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To Cosign or Not to Cosign

How often have you been approached by a family member, friend, business associate or other person and asked to cosign for them on a loan they wish to take out? This is not directly asking you for any money but instead to give your credit so they can secure the loan, perhaps at a better rate than they could obtain themselves. Further this cosigning is giving your promise to pay the loan if they do not.  What’s not to like about that deal? You just sign your name and your relative or friend can buy that home or car, start that business, or engage in some other project. It is almost like giving to a charity but without the deduction.

Or is it? Your kind gesture may cost you a great deal of money down the road if the borrower who you signed for fails to pay when required and the creditors reach out to you for the money. No, you never had the money in your hands and yes you trusted in the ability of the borrower to pay the loan without calling on you. But you still may be liable for the balance.  And by the way, while that loan is outstanding, did you know that YOUR own credit and ability to borrow money for yourself is limited because you signed on that loan? Anyone planning on extending credit to you will be able (and smart) to take that loan into consideration before making a deal.

This is not to say that you should never cosign a loan for someone else. You should know about the risks and make a decision with “your eyes open”. You might want to do some homework about the borrower and the reason for seeking the loan as well as how reliable the borrower has been in the past or is likely to be based on what you know. You might want to ask for some form of security from the borrower, such as their car title or other asset that would provide you with both leverage and some amount of recourse if the worst should happen.

The note is a legal document so think about talking with your attorney as well before you sign. There may be some good advice that will help you and possibly the prospective borrower as well. 

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