What do you do if a friend or relative asks you to co-sign a loan? Before you say yes, think about the obligations involved and how they may affect your own finances and creditworthiness. When you agree to co-sign a loan, you are equally liable and responsible for the debt.
While there are situations in which you may want to co-sign, the FTC encourages you to consider how it might affect your financial well-being. Things you should consider before agreeing to co-sign include:
- Can you 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.
- Even if you’re not asked to repay the debt, your liability for the loan may keep you from getting other credit. Creditors will consider the co-signed loan as one of your obligations.
- Before you pledge property to secure the loan, like your car, furniture, or jewelry, make sure you understand the consequences. If the borrower defaults, you could lose these items.
- If you agree to co-sign, ask the lender for copies of the loan agreement and other import papers.
Everyone wants to help family and friends, but it is important to know your obligations and risks before you agree to co-sign a loan.
Laws and regulations related to co-signing a loan vary by state. This is an excerpt from FTC: Co-signing a Loan. Refer to the Money & Credit section of the FTC website for the full article and additional information on co-signing a loan and other financial topics.