Today it is difficult, even for strong borrowers, to get a loan. To give them the extra edge needed for loan approval, some borrowers are asking friends or relatives to act as a co-signer on their debt. Before you decide whether or not to comply, make sure you know what you're getting in to.
Simply put, you are being asked to guarantee the debt. If the borrower does not pay, you will have to. You could be required to pay the entire amount of the debt in one lump sum, plus any late fees or collection costs. So before you sign, make sure that you can afford to pay this amount if you have to.
Some studies show that three of every four co-signers ends up paying the loan. And when you think about it, this makes sense. If the primary borrower could qualify for the loan, then the creditor would not have required a co-signer.
If you do decide to co-sign, make sure you can afford to pay the loan. If you're asked to pay and can't, you could be sued or your credit rating could be damaged. Also, be aware that this loan will show up on your credit report, even if the primary borrower is making timely payments. This is a debt for which you are liable, so it will affect your credit rating.
Finally, ask the lender to agree, in writing, to notify you if the borrower misses a payment. That way you may be able to jump in and start making the payments without having to immediately repay the entire loan amount.
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