The want to help out our friends is something that we are all guilty of. It is a good thing, up to a point. At some point in your life there is a good chance that you will be asked by a good friend to co-sign a loan for them. Maybe they have had credit difficulties in the past, which will make getting a loan hard for them. Saying no to such a request can e awfully hard sometimes, after all the only thing they want from you is your signature on a little piece of paper right?
Wrong! This is a decision that you should think long and hard about. It could affect your life in a big way. You need to ask yourself why it is that your friend needs your help in the first place. If it is because they have poor credit, do you really want to take the chance that they will be responsible now? If you co-sign it is you who will be responsible for the loan if they bail. Your credit can be at risk here, affecting your ability to get a home loan, car loan, credit card and so forth for years to come.
Before you sign anything make sure that you understand the following:
When you sign the contract you are promising that your friend will make all of their scheduled payments on time every month of every year. Are you sure that is something you want to risk your financial life on? Do you have the ability to pay the loan if they fail to do so?
What are the risks?
If your buddy needs someone to co-sign that means that they are considered high risk. If the lender, who is a professional thinks it is a risky move, what makes you think that you know better?
What about your credit report?
Doubtless your friend is asking you to co-sign because you have good credit, which is something you have always tried to keep up. If your friend does not meet their payment schedules and amounts it is your credit that will suffer.
The manner in which delinquent payments will be collected
The policies for the collection of such debts differ from state to state, so it is wise to check with your local legislation to see just how you will be affected. In some states the lender will not even attempt to get the money from your friend, they will go straight to you for it. This is because they feel you are the one that they can actually get it out of.
These are not the only things to be considered when deciding if you should co-sign for a loan. The amount of credit that you can get can even be affected because the money you signed for can count as debt owed by you.
If after thinking it over you decide that you do want to help your friend and co-sign for their loan be sure to at least take the following steps to protect yourself as much as possible.
When applying for the loan ask the lender to keep you informed of any late or missed payments on the part of your friend. This will help you to get control of any problems before they get too out of hand. And make sure to get copies for yourself of all loan documents. Keep these in a safe place at home where they are easy to find.
While it is always nice to help out a friend, you should not feel guilty if you decide against it in this type of case. The risk to you is enormous and if you plan on buying a house or a car in the future, you might want to think twice before saying yes.
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