By NAZHAT SALIM
Some people fear spiders, some are scared of the dark, and then there are those who shiver at the thought of co-signing a loan. But co-signing a loan is a lot less scary if you know what you're getting yourself into.
It's important to know what it means when you co-sign a loan. Typically, people co-sign loans for children going to college who don't have their own credit history, or for close relatives or friends who need a helping hand. When you agree to co-sign their loan, you are agreeing to pay the debt if the borrower does not. Basically, it's as if you're taking on a new loan for yourself, and this can significantly impact your financial well-being.
The first factor to consider is whether you can afford to pay the loan if the borrower does not. If you're asked to pay and can't, you could be sued and have your credit ruined. The loan will appear on your credit report, much like any other debt. If a payment is late, for instance, that derogatory mark will appear on your credit report, lowering your credit score. This can happen before you have any idea that there is a problem, as the co-signer often doesn't receive a monthly billing statement. Even if you're not asked to repay the debt, the loan may prevent you from getting other forms of credit since creditors will consider the co-signed loan as one of your obligations.
The second factor to consider is whether the borrower is reliable and able to make payments on their own. If they default on the loan, you may have to pay the full amount of the debt, late fees and collection costs. Moreover, depending on state laws, the creditor can collect the debt from you without first trying to collect from the borrower.
You can protect yourself by taking some precautions. You can ask the creditor to negotiate the specific terms of your obligation and limit your liability to just the principal -- the amount borrowed before interest -- on the loan. Then, you wouldn't be responsible for collections or late fees. Also, you can ask the creditor to notify you by mail if the borrower misses a payment or the terms on the loan change. It is also a good idea to get copies of important documents such as the contract, disclosure statement and warranty.
Ultimately, if you feel secure about both your finances and the borrower, co-signing a loan can be your chance to help someone else get started down the path to good credit. Share the good feelings, not the fear!
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