Have anyone asked you to cosign a loan with them? Especially if this is their first loan, the financial institution is likely to ask them for a cosigner, such as their parents. However, cosigning a loan with anyone carries responsibilities.
It's crucial for your own financial health to understand what your part in the loan could amount to.
If you're thinking about becoming a cosigner, consider these tips:
1. Evaluate why you want to cosign.
If you're cosigning a loan out of guilt or an obligation, then these aren't the best circumstances for serious financial decisions.
2. Understand the default consequences.
If the person who is asking you to cosign can't make the payments, then you become responsible. The lender can go after you and demand the payments plus interest and fees.
3. Understand the issues of release.
Although many loans have the option of releasing the cosigner after a period of time, the reality is different.
4. Get alerts about the loan.
As a cosigner, you have the right to receive alerts about the loan. You can sign up for alerts that go to your email or phone. These loan alerts will notify you of any changes and issues.
5. Consider a separate account with automatic payments.
You should have access to this account, so you can monitor payments.
6. Set up guidelines.
How will you handle a default on the loan you cosigned?
7. Understand the collateral clause.
If the loan requires collateral, are you prepared to handle a default?
8. Get copies of all the documents.
The lender is responsible for giving the borrower all of the paperwork. However, as a cosigner, you may not get a copy. It's crucial to ask the borrower to share the documents with you.
9. Understand the collection process.
Did you know that the lender could go after you before going after the borrower in a collection process? If you cosign on a loan, this is one reason that you want to ensure the payments are always current.
Cosigning a loan is a large financial responsibility with serious consequences. Ensure you understand all the terms of the loan - and your responsibilities - before getting involved.
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