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Answer These 6 Questions before You Co-Sign a Loan for a Family Member

Answer These 6 Questions before You Co-Sign a Loan for a Family Member - TaxACT

What’s the simplest answer to whether you should co-sign a loan for a family member? “No.”

That’s what all too many co-signers wish they had said when they were asked to co-sign a loan, even for an adult child or a parent.

Co-signing a loan does not always turn out badly, however.

There are times when a co-signed loan is just the boost your family member needs. It can work well sometimes – if you can answer “yes” to all these questions:

Do you understand what co-signing means?

When you co-sign on a loan, it’s really your loan, too.

This is true even if you don’t benefit from the loan. All too often, people say, “I don’t feel it’s really my loan.” Sorry, but it really is your loan.

Can you afford to pay the loan yourself?

Never co-sign a loan you’re not ready and willing to pay if the other party falls behind. This is an absolute rule – no exceptions.

More than half of co-signed loans are eventually paid by the co-signer. Tweet this

Remember that if you make the payments, the borrower still has possession of whatever he or she purchased with the money. You could be making the payments while the defaulted borrower is still driving a nice car.

If you put up any property as collateral, such as your house, you could lose it if the borrower defaults on the loan.

Can you reach your other financial goals while you are co-signed on this loan?

What happens if you decide to refinance your home or apply for credit when you are co-signed on a loan? In the eyes of your prospective creditor, you have more debt now.

It may be harder to get a loan or credit when lenders know you’re on the hook for someone else’s loan.

Answer These 6 Questions before You Co-Sign a Loan for a Family Member - TaxACT

Is the loan for a worthy cause?

When you co-sign, you’re doing someone a big favor.

It had better be for something important – perhaps even life changing – such as education or buying that first clunker car to get to a job.

Don’t even think about co-signing a loan the would-be borrower can’t really afford. Tweet this

If an expensive car or a motorcycle is out of their reach, they’re better off saving money and improving their own credit until they can get it themselves.

Can the family member pay for it some other way?

Don’t rush to co-sign if it’s not necessary.

Of course it’s easier to get a loan if Mom signs for it. Your family member may be surprised to find they can qualify for a loan if they try.

Avoid signing for student loans if at all possible.

Start with federal student loans, which do not require co-signers. Federal loans generally have better terms than private student loans, anyway.

Has the person been trustworthy so far?

If the reason your child or parent needs a loan is that he or she has lousy credit and can never seem to get ahead, think twice before you co-sign.

You may want to give your family member just one more chance, but your chances of being stuck with the bill are high.

If your family member has proven to be trustworthy in the past, that’s great.

Otherwise, you’re better off giving an amount of money you can afford to spare. If you can’t afford to give the money, you can’t afford to co-sign for it.

If your child or parent defaults on the loan, you’ll not only have to make payments, but your relationship with him or her is likely to suffer, too.

Don’t let that happen to you.

Did your parents co-sign a loan for you when you were starting out?

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About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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