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The Debt Dangers Of Cosigning A Loan

Often, it's considered a nice thing to do, many of us do it for close relatives, even though it may not be good for either of us. Cosigning a loan is often good, but sometimes a bad thing, as it is essentially a legally binding agreement that ensures you must pay back a loan if the borrower cannot or will not. So in this manner, cosigning a loan should definitely not be taken lightly. This is a big responsibility, so ensure that you trust the borrower, because if something goes wrong, you're simply going to have to pay back the loan.

Why Cosigning?

Let's face it, many of us who have received loans for cars or our home may not commonly have thought about needing a cosigner. For many of us, there simply is not a point in it. But, if you do not meet the basic credit qualifications set out by banks, you may need one. The qualifications are commonly referred to as the 5 Cs of credit lending, and you should know them.

Lending Qualifiers

Capital - A cash amount with demonstrates that loan payments will not be in jeopardy if the borrower's financial circumstances change. In one example, if you are borrowing for a business, most lenders will investigate whether you have invested any of your own money into the company.

Character - The borrower must have a history of responsibility and ensure the lender that all intents will be made to repay the loan.

Collateral - Something used to secure the loan, usually an object such as a house or a car which has some value. This item is usually seized if the loan cannot be paid. Character. The borrower must possess an air of responsibility in regards to repaying the loan.

Capacity - The loan applicant should be financially able to make the loan payments, which means he or she likely has a steady, stable job.

Conditions - The overall financial climate is considered during the loan application process. If the borrower does not meet the standards set out by the lender, the loan request may be denied. But, the lender may agree to lend the money with the aid of a qualified co-signer.

Capital - The person applying for a loan should have the capital necessary to pay off the loan should an unforseen event occur.

Cosign Time: Some Important Points

So your cousin, or younger sister asks you to cosign a loan. What to do? Well, even though this person is family, you simply must step back and ask a few questions. Firstly, take a look at the situation: why was this person turned down for the loan in the first place? Young people typically get turned down because they have little or no credit history, so a cosigning in this situation is generally common. Still, ask yourself this question: if a bank doesn't trust this person as a good credit risk, should you?

Another critical question to ask yourself is this: in the event that the loan signer is not either willing or able to pay the loan, will you be able to pay it back? Also, would you have difficulty making the payouts, or would you go into debt because of it. Never take on a responsibility which would become a problem for you.

As alarming as this sounds, recent statistics do show that as high as 75% of cosigners do actually pay off the loan themselves. Consider this point, and do take the concept of loan cosigning very seriously. Remember that no matter your relation with the person, you have the right to say no, and stand up to yourself. Sometimes, avoiding the risk is absolutely necessary.

Has cosigning a loan put you over your head in debt? Contact us here for a free debt consultation. We may be able to provide debt help.

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