Cosigning A Loan - Personal and Financial Consequences

Perhaps a friend needs to get a loan for a new business or your family member needs a new car or there are unpaid medical bills. If you are asked to cosign for a loan for anyone, you will find yourself with a serious decision. Do you want to make a commitment to repay the loan if the other person fails to do so?

This loan process involves more than just signing a few papers. This is a very serious business transaction. If you are not in a financial position to pay off the loan, in the event that the other party is unable to, there can be consequences that affect your future for a long time. It could hinder your chances to secure a loan yourself.

A number of studies were made to determine the percentage of loans that the cosigner ended up having to repay, because the other person was unable to pay it and the loan went into a default status. The results of these studies were quite disturbing, although the statistics don't take into account the personal relationship you have with the other person or your own personal situation.

Usually a person can not obtain loan approval because of a low credit score or he may have several other unpaid bills or a history of late payments. It could be that there has not been sufficient time to establish good credit or the person may have started a new job. Whatever the reason or circumstance you have been asked to cosign a loan, it is because you are in better financial shape than the other borrower. The lender must have someone who has a better credit rating to balance the risk presented by the other party's lack of credit worthiness.

The better credit rating may make you the best target for the lender if the primary borrower fails to meet their repayment obligations. The assumption that the lender may not get compensation from the primary borrower makes the collection efforts point toward you.

As a cosigner, you will be liable for any late fees or attorney fees associated with prosecution of claims. You could also have your wages garnished or you could lose any collateral used as security for the loan.

You must carefully consider what you are agreeing to if you say that you will cosign a loan. If you feel there is any chance that the borrower may not be able to stay with the agreement, you should not sign. You should keep enough funds available to pay the loan off even if everything goes smoothly for the period of the loan.

You must take all precautions to protect yourself in case of default and you must be sure to have the terms of your responsibilities in writing. The details of these responsibilities should be explained clearly and the lender should be told to contact you if the borrower is late with a payment so you can plan how to deal with the situation.

Make sure to do your homework about cosigning and lending policies in these types of situations so you won't be surprised by any other term or condition of the contract for the loan. You will have to make the final decision of whether or not to cosign. Try not to let your emotions or personal feelings get in the way of sound financial judgment.