Managing Debt

Should You Co-Sign That Loan?

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During this festive season, we often spend more time than usual with our family — for Thanksgiving and Christmas get-togethers. The early, chilly nights force us to spend more time indoors, hanging out with brothers and sisters and aunts and uncles and nieces and nephews.

Family bonds are strong. Most of us would do anything for family. So during family time this season, you might have a sibling pull you aside and quietly but politely ask you if you would co-sign a loan for them.

It puts you in an awkward position. Should you take on the loan? You might not want to co-sign anything but they are family, and their circumstances might be dire, so maybe you feel like you have no choice.

If you are thinking about co-signing for a loan, here are the credit implications you need to be aware of:

  • Co-signing a loan is just like getting a loan. Don’t make the mistake of thinking that it is some sort of secondary action that has no consequences for you.
  • The lending company will pull your credit report. Every time your credit report is pulled by a lender, your score goes down slightly.
  • Co-signing a loan will impact your credit score if your relative pays late or is unable to pay at all.
  • As the co-signer, you will be equally responsible for the amount owed. Therefore, if your relative doesn’t pay it back, you will need to do so.

Co-signing is a serious situation and it’s no different than getting a loan application for yourself. So take it seriously and think twice about co-signing even if it’s a family member asking.

If you choose to co-sign a loan, here is what you should do:

  • Do not co-sign for any amount that you cannot afford to fully pay yourself (if your relative is unable to pay it).
  • Ask that the invoices be sent directly to you and that your relative pays you and you will forward the money to the lender. That way, you will always be aware of payment due dates and you can ensure for yourself that no payment is ever late.
  • Keep very careful records of all payments received from your relative and paid to the lender. This will protect you if your relative disagrees with how much they owe, and it will protect you if your credit report is hit with a late payment notice in error.

There’s nothing wrong with co-signing a loan but make sure that you are aware of the risks and protect yourself as much as possible. Remember that even families are torn apart by money issues, and some of those money issues stem from co-signing.

Image: Vee-vee, via Flickr

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