Co-signing a Personal Loan
Co-signing a personal loan for family members or friends is a show of generosity that can draw the line between their eligibility and ineligibility for obtaining a loan. Nevertheless, such a decision for co-signing a personal loan is not a decision to be taken lightly. Potential co-signers are burdened with the responsibility of educating themselves as to how such a situation will affect them, particularly in the case of their responsibility for loan repayment if the actual borrowers default on the payment.
Several co-signers do not understand how co-signed loans affect their credit history. You must consider that co-signing a loan can affect your eligibility for a personal loan yourself, since the co-signed loan will also be used in the calculation of the ration of your debt to your income.
Not only your credit report, but also the interest rates at which you can get a loan are affected by the same loan. If you think it is worthwhile to co-sign a loan for a family member or a friend, make sure you have an understanding with that person regarding how long you are expected to be a part of the loan, making sure that after certain number of payments has been made, there will be an attempt to redo the loan with the borrower’s name alone. The more money that you are a co-signer for, the longer that you will be a part of the loan.
Sine a co-signed personal loan can affect your credit report both negatively and positively, it is imperative that as a co-signer, you set the loan up such that you can access all account information. This way, you can find out how much of the loan had been repaid, and what amount is still due. You must ensure that the lender intimates you immediately in case of any non-payment or late payment of any dues by the borrower. Every so often, it happens that the co-signer isn’t made aware of any issues with loan repayment until it already impacts their credit history.
When you co-sign a personal loan for a family member or a friend, you should keep in mind that not only will it affect your credit report, but may also affect your relationship. Money issues are the most common problems that sour a good relationship. Co-signers must necessarily take into consideration the circumstances that make the loan a requirement for the individual. If money mismanagement is the only issue at hand, then co-signing is not a favor you are obliged to bestow upon anyone. However, if the loan is necessitated by unfavorable circumstances, which were beyond the control of the individual, then it is worth considering.
Do not make a habit of offering to co-sign for everyone close to you in order to minimize your risks as a co-signer. Your habit will soon be known by all and sundry and random people will ask the same favor of you. In case you feel that your credit history and financial situation cannot hold up the consequences of a defaulted loan, do not co-sign. It may not be terribly easy to turn someone down, but it is sometimes important for you to do so.
Once you co-sign, you may even want the borrower to provide you with verification regarding payments, such as regular statements of information on cancelled checks. Minimizing your risk even further, you may insist that the borrower also procures an insurance cover for personal loans that covers the loan payments in case of non-payment due to ill health, unemployment or in the event of death.
Co-signing on a personal loan is not just signing your name on a piece of paper. The act is a significant step that will place your entire financial credibility at stake for an individual. You must make a thorough review of the person for whom you are co-signing, along with a study of their spending patterns. If the potential borrow is continually in debt or spends beyond their earning capacity, then do not sign and do not let that weigh on your conscience either. Some times that is the best thing or you to do. However, that is a decision only you have the right to make. If you do decide to co-sign for someone, then ensure that you can bear the cost of any payments they miss and that the lender keeps you in the loop with regard to payments made for the repayment of that loan.