Lenders who offer bad credit loans usually require the applicant to have a co-signer. Many people who have imperfect credit history ask their friends or relatives to help them get their loans approved by co-signing the contract.
Have you been asked to co-sign for someone? If yes, have you considered the possible risks involved with being a co-signer? Are you clear about what your duties and responsibilities would be as a co-signer? What can you to protect yourself as co-signer? In this article, let's answer these questions one at a time.
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Possible Risks Associated with Co-signing
Co-signing a loan for another person means that you guarantee that he/she is capable of the loan's repayment. With this assurance, you agree to take over the repayment obligations in the event that the primary loan holder defaults.
Unfortunately some people immediately sign-up the contract without first reviewing the Terms and Conditions or without a clear arrangement with the primary loan holder. Take note that as a co-signer, your personal credit history can be damaged in case there are problems with the loan holder's repayment.
Some lending companies will only try to get in touch with the co-signer after the primary loan holder defaults. However, the damage has already been done to your own credit. You may also be taken by surprise that you are now accountable for the loan holder's debts.
Some co-signers also found themselves in the middle of a messy situation. By the time you need to apply for your own loan, you may find it difficult to get an approval. Lenders may see you as a "risky" client because you are already responsible for another loan. Although, it isn't directly under your name, you are still responsible for its repayment in case of default.
On the other hand, if the lender feels that you are still capable of taking on a new loan, you may get an approval. However, if your credit rating has been pulled down due to someone else's late payments, you may not qualify for the best rates from your lender.
Thus, the best advice to remember before co-signing a loan is to treat it as if it's your own. If you are not sure whether you can keep up with its repayment, then it would be safer not to co-sign the loan.
Co-signer - How to Protect Your Own Credit
If you are willing to co-sign, the best way you can protect your personal credit and reputation is to closely monitor the primary loan holder's payments. Request the lending company to send you a copy of the monthly notices or updates so you can be immediately made aware if the loan holder falls late with the payment.
Evaluate the Terms and Conditions with the loan holder. Make sure that the person you are co-signing for is clearly aware of his/her obligations. If you have any concern, don't be afraid to discuss the matter with your friend. Make an agreement with your friend and ask him/her to talk to you about anything that concerns the repayment. After all, it is your credit and finances that is also on the line.
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