A family member or a close friend is usually a person with whom we have a special connection. We highly regard these relationships which allows us to willingly assist them when there is a need, especially when we are able. How does this translate when asked to co-sign for a loan? It may not be translatable – literally. Regard and caring for someone have no bearing on what their financial standing and ability is.
Co-signing a loan means risk
If you co-sign a loan, you take on all the risk for that loan. Your credit score, on the other hand, may only slightly improve if the loan remains in good standing. The lender may sue you first if payments aren’t made. Oftentimes, the primary borrower may already have bad credit. But this scenario could change your good credit to bad credit. Our close relationships can definitely be harmed by co-signing for a loan.
Co-signing can lead to mistrust
If you co-sign for a loan, then you need to know the payments are being made on time. This can be perceived as mistrust. Facts and trust just may not be translatable. Should the primary borrower fail to pay, the co-signer is liable for the entire balance. Sometimes co-signers have to sue primary borrowers because it’s the only way to get them to contribute to monthly payment.
Before you co-sign a loan
Be sure that you yourself will not need a loan anytime soon. Even though your credit may be good, a lender can deny a loan application because the person has too much credit in their name. Financially aiding another person may hinder you if the situation arises that you need a loan yourself.
After you co-sign a loan
Be ready and prepared to make the loan payment if the borrow does not. Another scenario to consider is charged-off debt. If the lender chooses not to be bothered with suing you and agrees instead to settle the balance owed, then you could have tax liability for the difference. Debt forgiveness income must be reported on your tax returns.
Think twice before you co-sign for a loan
Approach co-signing a loan analytically and with scrutiny. In some cases, co-signing a loan may be the right choice for your situation. But first examine all the risks, including your relationship and level of trust with the borrower. Ensure your interpersonal communication is precise and clear. When dealing with friends and loved ones, financial assistance may be better provided in the form of a monetary gift versus a co-signed loan.