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Don’t Cosign that Loan!

It’s not unusual to field a request from a friend or loved one to cosign a loan. It seems so simple and easy—just sign on the dotted line and you avoid social discomfort and awkwardness at the next family holiday. But is cosigning really that simple? Or is it a dangerous choice with harsh potential consequences?
Loaning More Than Your Signature
When you cosign a loan, you aren’t just giving your signature to help out a friend or loved one; you’re giving a guarantee of payment and loaning out your good credit rating. It may seem like just a signature on a line when the form is in front of you, but if the borrower stops paying, you’ll have to pick up the slack or risk sacrificing your credit rating.
The Reason a Cosigner Is Needed
There’s usually a reason that someone needs a cosigner for a loan. It might be because they’re inexperienced and have no credit rating yet, or that they’ve had some problems paying on credit accounts in the past. It’s important to know the reason because that should affect your decision to cosign. For example, if the borrower has little to no experience with credit, but have proven themselves ready to take on the challenge, you might be more likely to cosign the loan than you would for someone who has, time and again, shown that they aren’t capable of handling credit.
The Purpose of the Loan
Another consideration that should be weighed is the purpose for the loan. There are some loans, such as student loans or auto loans for someone who really needs a vehicle (not just an upgrade), that may be more compelling. If someone needs a cosigner for an unnecessary loan, you might be a lot less likely to lend your name.
Preparing Yourself for Fallout
If you decide to cosign a loan, you need to have a plan for the possibility that the borrower will default. You don’t want to be unprepared for this, so before you cosign, make sure you know what the payments are and that you have the ability to pay them should it become necessary.
The decision to cosign a loan is an important one and shouldn’t be made on the fly. Give yourself time and space to consider it and to develop a plan to compensate for default before you grab that pen.

About Dennis M. Postema

Dennis M. Postema, RFC, is a successful entrepreneur, best-selling author, coach, speaker and registered financial consultant. He is the founder of MotivationandSuccess.com, StoriesofPerseverance.org, FinancingYourLife.com and TheRetirementInstitute.org.

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