Co-sign a personal loan? 10 questions to ask yourself beforehand

Don’t become a personal loan signer until you have answered these 10 important questions. (iStock)

If your Credit or income is low Or you are just starting out, a bank or credit union may require you to have one Co-signer remove private loan. It is their way of protecting their risk by giving them a guarantee. However, if you are the person who is requesting a family member or friend to be a co-signer of the personal loan, then you need to exercise caution.

While helping someone else – especially someone in financial need – can be personally gratifying, there are several drawbacks. Her Creditworthiness can be negatively affected if the borrower does not make their payments on time. You could be denied credit if the loan makes your debt to income ratio too high. And you might be forced to pay the loan if the borrower defaults or dies.

Before becoming a personal loan co-signer, ask the prime borrower (and yourself) these 10 questions.

1. Why does the lender need a co-signer?

If the main borrower is young and has not yet built a credit history, a lender will often ask to get a consignor as a guarantee. Knowing the person is responsible, you can consider being a shipper. However, if the borrower has a low credit score because of a history of poorly managing their finances, consider this a red flag. Is your money in the recent past? Do you have Filed for bankruptcy or experienced an eviction? You need to know why the institution refuses to take a risk before you take it on for them.

2. What is the purpose of the loan?

Borrowers take out personal loans for a variety of reasons. Sometimes they need a vehicle to get to and from work or a down payment for an apartment. These can be solid reasons. However, if a borrower wants money on a dream vacation or an expensive boat, they may not want to go ahead. Knowing why they need the money will help you better assess their financial judgment.


3. What is the loan amount?

If the debtor does not repay the loan, a consignor is responsible. Knowing the loan amount can help you make a decision. If it’s small, e.g. B. $ 1,000 will reduce your risk. But if the borrower is looking for something big, like $ 100,000 personal loan“You could lose a large amount of money if you don’t pay. Also, familiarize yourself with the terms of the loan, such as the term and the APR. When you need to take the payments, you want to know what to expect.

4. How are you going to repay the loan?

Ask the main borrower how they are going repay the debt-Exactly. They have the right to know where the money is coming from, how safe the source of income is and what to do if their plan fails. Also, find out what other expenses they have and how the loan repayment fits into their budget. And consider asking if the borrower has adequate life insurance to pay off the loan in the unfortunate event that they die. If not, you can request that they get a new policy to cover the life of the loan.


5. How do I stay up to date on the loan repayment schedule?

In some cases you won’t know the borrower missed payments until the loan is collected and has a negative impact on your creditworthiness. Request to be added to the lender’s communications. Get the credentials to check the loan online. And tell the borrower to let you know immediately if they encounter any unexpected financial difficulties.

6. Does the lender offer approval by the co-signer of the personal loan?

In some cases, lenders will release a co-signer after a certain period, provided that the main borrower has proven that he will repay the loan on time. Ask the borrower to take out a loan that has this feature for you.

7. What alternative ways are there to raise the money?

If the loan required a co-signer, find out if the borrower has explored other lenders or ways to raise the money. Maybe they can sell some of their personal items? Or could they get a part-time job? You want to be sure they haven’t taken the easier route of getting a co-signer.

You also need to ask yourself some questions.

8. Is my credit history healthy enough to process this addition to my score?

Co-signing a loan increases your personal debt burden and becomes on yours Credit report. If you plan to take out your own loan in the near future, you could jeopardize your chances of getting approval if the co-signed loan balance raises your debt-to-income ratio too high or the borrower defaults on your creditworthiness.

9. Can I afford to pay the debt?

Even if the borrower is responsible and has a good opportunity to repay the loan, situations can arise that change the best plans. Do not sign a loan if you cannot afford to make the payments or pay the debt. Assume the worst case and hope for the best.


10. What is my gut feeling?

If the person has proven in the past that they are not financially responsible or if they have failed to keep promises, trust your instincts. While you may want to give preference to the person, you probably have an idea of ​​whether this will end well.

Don’t be afraid to say “no”. It may be better to disappoint someone now than to grapple with the impact on your finances and relationship if the person has defaulted on their credit. Trust your gut instinct and you will avoid asking “What did I think?”

About Gloria Skelton

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