Cosigning Considerations

Many people reading this post have been -- or will be -- asked by a relative or friend to "cosign" a loan, a lease or rental agreement, or other financial obligation. Even though we all like to help others, there are several considerations before you sign on the dotted line. Although you may feel obligated to cosign for a relative or friend, you should know the associated risks.

First, don't deny the obvious: If you have been asked to cosign, it is very likely that your friend or relative has credit issues. Sure, first-time credit users or those with short credit histories can be good risks, such as your son or daughter buying his or her first car, but be sure you know what you're getting into beforehand. A friend with credit issues may share more than laughs with you; they may just be sharing their financial troubles with you too. After all, if the person met all of the normal credit criteria, there wouldn't be a need for a cosigner.

Second, realize what is being asked of you: If the other person doesn't pay, YOU do! Sure, in some situations, the creditor must try first to collect from the primary debtor before trying to collect from the cosigner, but in many situations this is not the case. The creditor can collect from either of you at any time. So, be sure you understand what happens if the payments are not made by the other person, who needs the cosigner.

Third, understand the notification process: If the loan or agreement is not paid as agreed, will the cosigner receive separate notification? In many cases, a notification to one of the parties may constitute notification to all. This is especially important to know if the person you are cosigning for maintains a separate residence or a separate mail box.

Lastly, collateral may be lost: If you pledge your own possessions as collateral, such as a vehicle or real estate, you may lose your property if payments are not paid. So, make sure you can afford to make the required payments on your own, or you may risk losing what you pledged for the other person.

As you can see, cosigning financial obligations doesn't come without risk. In some cases, it may be much more risk than you care to expose yourself to.