As good as it feels to help someone who is really in need, if you’re ever asked to back somebody up on a loan, you should think long and hard before answering yes. In fact, the response should be no in most cases. It’s just too risky.
However, if it’s someone for whom you really care, you’re going to need a very good reason for refusing. Considering these questions to answer before you cosign a loan will provide you with more than ample fodder to justify a denial.
On the other hand, if you decide to do it anyway, at least you’ll go in with your eyes wide open.
Can You Afford to Repay the Loan Yourself?
People say you should never loan anything you can’t give. Similarly, you should never cosign a loan you can’t afford to repay yourself. While it’s true the lender won’t write the loan if your finances look too shaky to support it, if you’re planning to make another purchase, or if an emergency situation comes up and adds to your financial burden, you could find yourself over-extended.
How Can This Affect My Credit?
When you cosign for a loan, the lender treats you as the borrower. This means all responsibilities surrounding the loan will fall to you to fulfill if the borrower flakes. It will also go on your credit record as a negative event and you’ll be on the hook for the entirety of the outstanding balance, as well as all accrued interest and fees.
What’s more, if the amount of the loan pushes your debt to income ratio out of balance, you could be denied a subsequent loan, even if the cosigned obligation is in good shape. The cosigned loan appears on your credit report as an outstanding obligation for which you are responsible until it is paid off.
Why Can’t They Qualify on Their Own?
Young people often get turned down for their first loans. With no track record by which they can be judged, lenders can be reluctant to take a chance on them. If it’s your child, grandchild or some other near relative, the temptation to help can be strong. And, it might be OK—if they’ve proven trustworthy in other instances and you realize you’ll be responsible for everything should they default.
Conversely, if the person asking can’t qualify for a loan because they’re behind on existing debts, you’ll be better off referring them to a company like Freedom Debt Relief to help them clear up those obligations before trying to take on any others.
Is There Another Way to Get It?
If a friend asks you to cosign a loan for a car so they can get back and forth to work; rather than helping them get a loan on a new car, you might be better off lending them some cash to buy a used beater they can use to get back and forth while they save for the car they want to buy. In other words, look for alternatives to taking out a loan to accomplish whatever it is they’re trying to pull off with your credit. If the idea is simply to help a young relative build a credit history, consider staking them in a secured credit card instead. This limits your exposure to a more manageable level, while positioning them to prove they can handle the responsibility.
Statistics show the cosigner—rather than the borrower— pays off more than half of all cosigned loans. Considering these questions to answer before you are cosigning a loan might help you keep a valued relationship on good terms.