Cosigning a loan is becoming more and more popular, especially, as it becomes increasingly difficult for young people, low income earners, and those with poor credit scores to obtain credit. Before you agree, take five steps to protect yourself:
1. Read the contract carefully so that you know what will happen if the primary borrower makes a late payment. Will the lender contact you before reporting to the credit bureaus?
2. Track the payments online so that you know when the payments are due and when they are received. If the primarily borrower does not pay on time, make a last-day payment to ensure that your credit score is not adversely affected.
3. Consider paying the bill yourself and having the primary borrower pay you directly. Of course, this comes with its own risks (what if the borrower never pays you?), but it allows you to control the payment, ensures that your credit report and the borrower’s credit report benefit from the score, and prevents any late fees or penalties from accruing. An even bigger benefit is that the borrower is less likely to default if it means looking you in the eye and explaining why he is not handing you the monthly check.
4. Ask for collateral before agreeing to co-sign. This is not only a wise financial move, but it might also save your relationship. If the borrower defaults, at least you have some recourse.
5. Refinance as soon as possible. After a year of timely payments, contact the creditor and see if the loan can be refinanced in the primary borrower’s name only.
The long and short of it is this: cosigning a loan is a risky move, no small favor to the primary borrower. That’s not to say you should never cosign on a loan, but if you do, be sure you take as many actions possible to mitigate the risks.
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