Not so fast! Here's what you should know before you sign on the dotted line.
A lot of us would do anything to help our loved ones out of a crisis, but would you put yourself on the line financially? In matters of money, love's got little to do with it, and it should never be the sole factor for providing financial support. So before you cosign a loan, know exactly what you're promising by taking these three important points into consideration.
WHAT YOU NEED TO KNOW:
1. HAVING A COSIGNATORY PROTECTS THE LENDER. Obtaining a second signature on a loan is a risk-reduction strategy on a financial institution's part. When a potential recipient doesn't meet the institution's lending requirements because of credit rating, lack of job stability or insufficient assets to advance a loan in that person's name only, the individual may require a cosigner who does meet the criteria—someone with a good credit rating and the ability to repay the loan if the recipient is unable to do so.
2. YOU'RE LIABLE. Putting your signature on the dotted line means that if your friend or family member cannot make a monthly payment, you're on the hook for it. And if that person can't make payments going forward, the responsibility becomes yours. If you don't deliver, your credit rating is at risk and your financial future could be affected. Be certain you can afford to cover the whole loan if things go sideways.
3. MIXING MONEY AND RELATIONSHIPS IS TRICKY BUSINESS. Your loved one might start with the best of intentions regarding the loan, but life happens. That person might lose his or her job, have work hours cut, develop a serious illness, get divorced, close a business or experience a string of bad luck that precludes making payments, leaving you to carry the load. Consider what taking over the loan will do to your relationship; a bit of honesty up front could possibly save you a considerable amount of money and heartache later.