We all want to help our friends out when they are in trouble. It's good, but only up to a certain point. There's a good chance that a good friend will ask you to co-sign a loan for them at some point in your life. They may have had credit problems in the past, which will make it hard for them to get a loan. Sometimes it's really hard to say no to such a request. After all, all they want is your signature on a small piece of paper, right?
Wrong! You should give this a lot of thought before making a choice. It could make a big difference in your life. You need to think about why your friend needs your help to begin with. If it's because they have bad credit, do you really want to take a chance that they'll be responsible now? If they don't pay back the loan, it will be your responsibility if you co-signed. Your credit could be at risk, which could make it hard for you to get a home loan, car loan, credit card, and so on in the future.
Make sure you understand the following before you sign anything:
This is your job.
When you sign the contract, you promise that your friend will make all of their payments on time every month of every year. Are you sure you want to put your money on something like that? Do you have enough money to pay back the loan if they don't?
What could go wrong?
If your friend needs a co-signer, that means they are a high risk borrower. If a professional like the lender thinks it's a risky move, what makes you think you know better?
What about the report on your credit?
Your friend probably wants you to co-sign because you have good credit and have worked hard to keep it that way. If your friend doesn't pay on time or pay the right amount, it will hurt your credit.
How payments that are past due will be collected
Different states have different rules about how to collect these kinds of debts, so it's best to check your state's laws to see how you will be affected. In some states, the lender won't even try to get the money from your friend. Instead, they'll come right to you. This is because they think you are the one who can really help them get what they want.
When deciding if you should co-sign for a loan, you should think about more than just these things. Even how much credit you can get can be affected by the fact that the money you signed for can be counted as debt you owe.
If, after thinking about it, you decide you do want to help your friend and co-sign for their loan, make sure to at least do the following things to protect yourself as much as possible.
When you apply for the loan, ask the lender to let you know if your friend ever pays late or doesn't pay at all. This will help you get problems under control before they get too big. And make sure to get copies of all loan documents for yourself. Put these somewhere safe at home where you can easily find them.
Even though it's always nice to help a friend, you shouldn't feel bad if you choose not to in this situation. The risk to you is huge, and if you want to buy a house or car in the future, you might want to think twice before saying yes.
