Loved ones tend to support one another, especially when times get tough. Although there is no one correct way to support another person, loved ones do tend to step in when someone they care about is struggling. Sometimes, that support is shown in the offer of a monetary loan or in the offer of co-signing a loan for someone who is struggling financially or is trying to make a dream come true.
The offer to loan someone money or co-sign a loan for that individual is incredibly thoughtful. However, it is important that all co-signers understand the potential perils of this decision. Educating yourself on the potential pitfalls associated with co-signing a loan may or may not inspire you to seek an alternative solution to your loved one's situation. However, it is important to understand what you may be getting yourself into, regardless of whatever decision you ultimately make when it comes to co-signing.
For example, if you co-sign a loan for a loved one and that loved one ultimately files for bankruptcy, the lender may either come after you for repayment or may damage your credit score significantly if you fail to pay off your loved one’s loan. Becoming a co-signer means that you will be held responsible for your loved one’s debt if he or she cannot or will not pay it off.
Please, think carefully before you co-sign a loan for a loved one. You may feel that it is important for you to support your loved one in this way, but the consequences of this decision may be significant.
Source: NJ.com, “Your Money: The perils of co-signing a loan,” Karin Price Mueller, April 8, 2014