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What Are the Risks of Co-signing?

If you haven't been asked by a close friend or family member to co-sign on a loan or credit card application yet, consider yourself lucky. Chances are you will be asked at some point in your life, so why not prepare yourself to give the right answer now?

The key thing to remember when co-signing any loan is that you are being asked to take on a risk the lender itself will not even take. What do you know that a professional lender doesn't? Do you have good reason to believe the borrower can really repay the debt themselves? And in the event they can't, can you personally afford to make the loan payments in order to avoid defaulting on the loan?

If you do decide to go ahead and sign the bottom line, some of the major risks to consider include damage to your own credit scores if loan payments are made late or missed, having to pay the full amount of the loan in the event of default, and the fact that your own personal borrowing power might be limited due to your cosigning the loan. It's important to remember that lenders will often include co-signed loans when evaluating your debt to income ratio, as it is considered a liability even if you are not the borrower.

Co-signing any loan or a credit card application is a serious financial decision. Tread cautiously, and only consider it when you really feel the need to help a close family member or friend gain access to credit and you have every reason to believe they have the ability to repay the loan. And even then, you should only proceed if you can afford to make the payments yourself.

on Tue, 2016-06-07 15:31