Things to Consider Before Co-Signing a Loan

Cosigning is a legal process in which a person signs a document jointly with a person. In majority of the cases a co signer is needed when the person who has to borrow the money is unable to obtain the loan on their own.  So basically when a person cosigns a loan they automatically become the guarantor of the debt. And in case the borrower fails to pay the debt obligations the cosigner has to pay for the amount.

Now in general cosigning is quite a generous act in which you get to help a person who is need of a loan but is unable to obtain it due to a bad credit score or a unavailability of it.  In such cases cosigner prove to be of great help. But there are a certain things that one should keep in mind before cosigning a debt because it has its own risk.

So here are a few points that one needs to consider before cosigning a debt.

Try to know the purpose of the loan

Before getting into cosigning a debt one should know the reason for borrowing a particular loan. Also in cases where the borrower wants to avail the loan in order to clear other debt, you may want to re consider cosigning.  But in situations where the borrower need a loan for emergency purpose you can be assured while co signing that the debt will be cleared by them.

  • You too become the borrower

This is something you must not forget while cosigning the loan. As soon as you cosign the loan you too become a borrower in front of the loan issuers. As a result both of yours credit history is reflecting the loan that is issued. Now by nay chance if the borrower fails to provide the loan then it may lead to a decrease your credit score as well. So you need to ensure that the debt is paid on time.

  • Consequences on your tax

Now not being able to pay the debt by the borrower may lead to impact the tax of the cosigner as well. This is because if the borrower fails to pay the debt on time and the loan goes in default, then the settlement seems to be a better idea. Now here the settlement is always below the outstanding balance. This may end up with you facing tax liability due the difference between the settled balance and outstanding balance.

  • The advantage of exit strategy

Now this is a smart approach to remove yourself form the loan equation if you smell trouble. So you need to be prepared with an exit strategy before cosigning a loan. You can ask about this to the lender whether it is possible to exit the bond at any point of time.

  • Understand the risk of losing your property

So as a co signer if you are putting your property on stake you may end losing it if by any chance the borrower is unable to pay the debt on time. So before cosigning any loan think about this a multiple of times.

Thus by considering the above points you can go ahead with co signing if you feel secure enough!

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.

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