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Should you Cosign on a Loan?
People are able to legally enter a binding contract on their 18th birthday. At that age most youngsters don't have a full understanding of what signing their name means.
There are times when people need to cosign loans, such as helping their kids start credit or cosigning for an apartment, cell phone, car loan or credit card. By law, the cosigner is guaranteeing the loan. They won't get the monthly bills; they are making a promise to pay the lender if the bills don't get paid. It is a risk that should be considered.
Things to consider when cosigning:
-Other credit companies will look at this as if you were obligated for the full amount of the loan.
-You are legally liable for the amount of the loan as the borrower and you can be sued if the loan is not paid.
-Even if the borrower misses one payment, the lender can begin collection efforts against the cosigner.
Cosigning on a loan can be a very generous and and important step for people on both sides of the lending and credit process. For the borrower, it allows them to enjoy credit that they otherwise would not qualify for. For the cosigner, it allows him or her to build credit while not actually paying any money (in a successful loan agreement). And for the lender, it is a chance to do business with the security of limiting potential losses.
There are ways to protect yourself from getting in the hot seat. Some lenders will allow you to limit your liability to the principle amount of the loan. They can notify you immediately of a late payment.
Sometimes if the borrower has earned enough credit after paying on time for a while, the lender may let the cosigner out of the obligation.
Financial decisions, while made easily with a pen stroke, have lasting implications on a young person's credit.
Being a cosigner is a serious commitment and should not be done without careful consideration. There is a lot to know and the best way to protect yourself is to know and understand your risk. Ask questions, and require some of your own terms.
Cosigners are like copilots. They fly and crash along with the pilot. Know what flight you're getting on, and who is flying the plane.
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