Co-signing A Loan Can Damage Your Credit

A friend or relative is suffering with credit problems. They need help getting a car loan or they are trying to rent an apartment. They want you to be a co-signer on a loan. You want to be a pal and help them past their financial woes. However, the goodwill gesture could leave your credit and relationship in tatters.

Be Honest About Finances

People with bad credit have few options. Lenders assess high interest rates for car loans and other loans to borrowers with poor credit. For some of these distressed people, their credit problems are so dire, they need a co-signer for a loan – usually a friend or a relative. By becoming a co-signer, you share the responsibility of repaying the loan and could be penalized if the borrower goes delinquent through no fault of your own.

Therefore, it is important to get details about the finances of the person you are co-signing for. It is hard for people to talk about personal finances, but necessary in this case because your credit is at stake.

Someone is asking to piggyback on your credit. If that person does not pay, you are responsible and have to pick up another debt. If you choose to co-sign a loan, emphasize to the borrower that the loan bill needs to be paid each month and on time. Check up regularly to see this is being done. If there are no diligent follow-up measures, your favor could lead to a lost friendship or family rift. Some things to consider:

• When you are approached to co-sign a loan, think like a conventional lender. Consider the likelihood the borrower will pay off the loan and his or her financial and employment status. Ask to see the borrower’s credit report and ask why the borrower needs a co-signer.
• Ask yourself if can you handle the additional debt load if the other person fails to pay.
• Get all the details about a loan if you choose to co-sign.
• Seek advice from a financial expert before you co-sign on a loan

Alternatives To Co-Signing A Loan

Instead of co-signing a loan, you could direct the friend or relative to debt settlement or debt consolidation. Debt settlement can help a person reduce credit card debt.

The fastest way to regain good credit is to reduce total debt and consistently make payments on time. The borrower would learn good financial techniques and would benefit by improving their credit before applying for a loan. The borrower would take personal responsibility for his or her finances, instead of possibly tying up someone’s money in a loan.

Author bio: Brian Williams, a graduate of the University of Texas at Arlington, has 11 years’ experience writing and editing at daily newspapers in Texas. Learn more about Credit Solutions. Credit Solutions is your alternative to debt consolidation.