You might find a friend or relative wanting you to co-sign his or her loan. While helping someone in their time of need is a great thing to do, you should be thoroughly aware of what you are getting yourself into when co-signing a loan. Some important things that you need to do before you co-sign on a financial agreement are:
• Cosigning is not like giving someone a reference for opening a bank account or a credit card. By co-signing on a loan document, you undertake the responsibly for paying back the loan if the primary debtor fails to do so. You should also be aware of the fact that the lender can approach you directly for paying back the loan, even if the primary debtor has not defaulted on the loan. Co-signing is akin to taking a personal loan yourself, so make sure that the person you do it for is worth it.
• Now that you know what your role as co-signor entails, you should also know what the lender can end up doing to you if the primary debtor defaults on the loan. In the first place, you will be required to pay the loan in full if the debtor defaults on payments. Not just this, you will also be responsible for paying any late, documentation or legal fees if applicable. In case of non-repayment of the loan, the lender can sue you, get your wages garnished and even force you to sell your property if you have pledged it for the loan.
• If you default on a cosigned loan, it will show up on your credit history just as clearly as your own unpaid loans will. So failure to pay can end up damaging your credit history for good.
However, you can insure yourself against all the above by making sure that you actually have the means and the intention to pay back the loan if the debtor defaults on it. Ask the loan company to inform you in writing if the debtor defaults on any payments so that you can handle the problem before it turns onto a full blown crisis. Make sure that you have all the loan papers with you and be completely aware about everything regarding the loan including the amount of loan, the purpose of the loan, the terms of repayment and any other special clause that it carries.
Important to know: If the debt is owed to a credit card company, you can try negotiating to pay off a portion of what is owed. Most credit card companies would rather accept a lower repayment amount over than wait a long period of time for an uncertain result. If you end up negotiating a smaller repayment lump sum, make sure you get a clean credit record as part of the deal.
The bottom line is that you should treat co-signing a loan as if you were borrowing the money yourself, because when push comes to shove, that's exactly what you're doing.
