How to minimize the risks of co-signing a loan

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It is a serious decision to sign a loan with another person. On paper, you don’t get anything out of it, but you have a lot to lose. Whether it’s a car loan or maybe a student loan, it probably won’t directly benefit you. But if the other person doesn’t repay the loan, it does impact you. You are responsible for paying it back.

You might need to help if it’s a son or daughter with a limited credit history who needs help getting started, or if they still don’t make enough money to get a loan on their own – same. But people with bad credit histories might ask for a favor to help them.

Here are a few things to settle before agreeing to co-sign a loan. Who will make the payments? It seems obvious it’s the other person, but make sure it’s really clear. Discuss what happens if the other person cannot make the monthly payment. You can pay it, but how long will you keep doing it? Maybe you say three times and then the car is sold. At some point, it might be good to refinance the loan on behalf of the other person. Set a firm deadline.

The problem is, you can’t stick them with that. So it’s risky. But if you’re doing this to help your son or daughter get ahead, here are some ways to stay ahead of the issues.

Make sure you have access to the account online so you can monitor it. Make sure the lender informs you of any missed or late payments. Communicate regularly with the other person about the loan. Make sure they stay on track.

If you are planning to co-sign a loan for an adult child, you can do some practice runs. Buy their cell phone and ask them to pay you back monthly. See how they do it.

But be aware that if you’re doing this for a distant friend, coworker, or relative, that financial relationship can ruin a personal relationship if things don’t go well.

Make sure that you can cover this loan if the other person cannot, because whatever happens will have an impact on your credit score as well.

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