CMPS News Flash!!

Have you ever thought about co-signing on a loan for a close friend or family member? Many people have, and have regretted the decision. Before doing so it's in your best interest to understand your obligations to the lender.

Just like lending money to friends and family, cosigning can have the same disastrous effect by ruining friendships and destroying relationships. Ask yourself these important questions:

1. Why does this person need a co-signer in the first place?
2. Do I trust the person enough to make the payments on time?
3. Do I understand the threat to my own credit reports and scores?

It's one thing if you're cosigning for a child who needs help establishing their own credit.

In this situation, co-signing will certainly help build your child's credit files. But, you're also counting on his or her ability to properly manage the debt, assuming they are the ones responsible for making the payments.

In this case you'll have to be prepared to take over the payments if your child is unable to make them.

The alternative is a tough lesson for your kid and damaged credit reports.

It's quite another if the person you're cosigning for has had problems with paying their credit obligations in the past. That should be the first red flag when considering being a cosigner. If the lender has concerns about the individual's ability to pay back the loan without having you as a cosigner - then there's probably a very good reason why the lender doesn't want to assume the risk.

Shouldn't you have the same concerns?

The bottom line is that when you cosign for a loan, you are equally responsible for the loan. You're putting YOUR credit on the line in the event that the primary borrower is unable or unwilling to pay back the loan. This means that you're guaranteeing the payment! So not only are you helping them get a loan, you're virtually agreeing to pay the debt yourself if something goes wrong.

So what if something does go wrong and the person you co-signed for defaults on the loan?

Let me put it this way, if you aren't able to pick up where the other person failed, it's going to impact your credit just as if the loan were solely in your name. This also means that if the loan goes to collections, that collection will be reported to your credit report. If that collection spirals into a lawsuit that becomes a judgment, the judgment will also be reported to your credit report.

Think it can't get any worse?

Think again - if the collection agency decides to sue, they'll sue both of you for the debt and can even come after your property or garnish your wages.

I shouldn't have to tell you that if it gets to this point, your credit is shot and instead of having the excellent credit you were used to - you'll need a co-signer yourself in order to to qualify for a loan.

Doesn't sound like such a great idea now, does it?

It's not that co-signing is always a bad thing - it's just something that you need to fully understand so you can weigh the risks versus the rewards. If you're still considering co-signing, there are a couple of precautions that you should take when doing so:

1. Know and understand the financial habits of the person you're cosigning for. You'd be surprised how many people cosign when they barely know the borrower.

- Get copies of their credit reports and credit scores.

- Find out how they're paying their current bills.

- Ask for income statements or paycheck stubs to guarantee that they can afford the payments, etc.

Remember, if they're asking you to cosign, these are things they should be willing to share considering your liability.

2. Make sure that you can afford to pay the loan in the event that the person you're cosigning for is unable to fulfill their part of the bargain. Always plan for the unexpected: job loss, divorce, illness or even death are never planned and can easily ruin all the best intentions to repay a debt.

3. Talk with the lender and be sure to request that you be notified if the account ever goes delinquent. In fact, it's probably a good idea to request a copy of monthly statements so that you can monitor the loan and make sure it's being paid.

This is important because often times, the first few late notices are only sent to the primary borrower. The cosigner doesn't even realize the account was late until they pull their credit reports - and then it's probably too late. Credit monitoring services can be used to monitor for any new delinquencies that appear on your credit reports.

4. Keep copies of everything, especially the contract and truth and lending disclosures. You never know if you're going to need them.

Remember, once you co-sign, you're stuck and there's no going back. Make sure you're prepared and understand the risks before you sign.

It could save your credit!