There comes a time in our lives when we have to take some tough decisions. A situation may arise when someone you are close to may approach you to co-sign a loan. Now you are in a dilemma: to co-sign or not. If you decide to co-sign, you should remember that the responsibility of the loan/credit card lies equally on your shoulders. If the person you co-sign with, defaults on the payments, the lender will insist you make the payment. If you fail to make the payment, it will harm your credit rating and can face legal action if the lender chooses to file a court case.
If the lender takes legal action against you, they can file a lawsuit for recovery of the debt, dispose off your assets or freeze your wages and in turn, harm your credit rating. So if you have decided to co-sign for someone, give it a very careful thought, as there are enormous risks associated with it. Ask yourself these following 5 questions before co-signing.
1. Do you want to risk losing your assets and good credit rating by co-signing? This is difficult to answer because you are willing to help only the people who mean a lot to you and who you are sure will not default on their payments.
2. What is the reason the person wants you to cosign? Find out the main reason why the person expects to co-sign and if the poor credit due to non-payment of debt is the main reason. If the person is young, are they mature and responsible to take the burden of the loan. Are they financially established to repay the loan as per the schedule? If you re not sure about the person, do not cosign.
3. Have you gone through the fine print of the contract thoroughly? Keep yourself properly informed about your status and what actions can and cannot the lender initiate against you. Understand the terms and conditions of the agreement properly and do not let anybody coerce you into accepting any unacceptable terms.
4. Talk to the lender about negotiating the terms that can deal with restricting your share of liability to the amount outstanding, except for penalty fees, or late charges etc. Ensure the lender will immediately inform you about any late payments, so that you can handle the problem before it becomes unmanageable and does not show on your credit report, or the loan is called in by the lender.
5. In case of default, do you have the financial capability to repay the whole loan amount? Can you raise the funds yourself? If you are not sure about it, avoid cosigning for the loan.
If you can answer all the above questions in positives and are sure that nothing untoward will happen, talk to the borrower and explain the implications of defaulting on the loan, before cosigning. Also ask them how they propose to repay you if they default. Get all the agreements in writing.