Unlocking The Risks: What You Must Consider Before Co-signing That Loan

Have your adult children asked you to cosign a loan with them? Especially if this is their first loan, the financial institution is likely to ask them for a cosigner, such as their parents. However, cosigning a loan with anyone carries responsibilities.

It’s crucial for your own financial health to understand what your part in the loan could amount to.

If you’re thinking about becoming a cosigner, consider these tips:

Evaluate why you want to cosign.

If you’re cosigning a loan out of guilt or an obligation, then these aren’t the best circumstances for serious financial decisions.

You may be tempted to help a family member or friend, but cosigning a loan is a big responsibility. If this person defaults on the loan, then you may be responsible for the entire amount.

You’re putting the relationship at risk by signing a loan because things may not turn out the way you expect.

Understand the default consequences.

If the person who is asking you to cosign can’t make the payments, then you become responsible. The lender can go after you and demand the payments plus interest and fees.

In addition to being responsible for the payments, your credit scores will be affected by the default.

You may have trouble getting future loans because of cosigning on a loan that defaults.

Understand the issues of release

Although many loans have the option of releasing the cosigner after a period of time, the reality is different.

You may find that you can’t be released from the loan, and you may be stuck as a cosigner for the entire term. Lenders don’t like to release cosigners because it increases their risk.

Get alerts about the loan

As a cosigner, you have the right to receive alerts about the loan. You can sign up for alerts that go to your email or phone. These loan alerts will notify you of any changes and issues.

Consider a separate account with automatic payments

You should have access to this account, so you can monitor payments.

Set up guidelines

How will you handle a default on the loan you cosigned?

Before a tragedy occurs, you may want to discuss guidelines for defaulting. Your relationship is at stake, so be careful with your discussion.

You may want to set up a rule that the person who is getting the loan notifies you before he or she can’t make a payment. This will allow you to get involved and prevent your credit from being hurt.

You may also want to discuss the consequences for defaulting before it occurs.

Understand the collateral clause

If the loan requires collateral, are you prepared to handle a default?

If the loan goes into default, then you may lose your collateral. It’s important to understand you could permanently lose the home, property, car, or other items you listed as collateral.

Get copies of all the documents

The lender is responsible for giving the borrower all of the paperwork. However, as a cosigner, you may not get a copy. It’s crucial to ask the borrower to share the documents with you.

Inspect the documents yourself before you sign anything.

Understand the collection process

Did you know that the lender could go after you before going after the borrower in a collection process? If you cosign on a loan, this is one reason that you want to ensure the payments are always current.

Cosigning a loan is a large financial responsibility with serious consequences. Ensure you understand all the terms of the loan – and your responsibilities – before getting involved.

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