Think carefully before cosigning a loan

Pen on loan papers

Tight lending requirements and uncertain incomes have made it harder for many people to get bank loans.

If you’ve got good credit, friends and family members may approach you to cosign a loan. Think carefully before you pick up that pen.

When you cosign a loan, you promise to repay the loan if the primary borrower can’t or won’t make payments -- a legally binding arrangement.

Can you make the payments if the primary borrower defaults on the loan? Would repaying a cosigned loan mean delaying or canceling some of your own financial priorities?

Don’t cosign a loan if repaying the debt would cause you serious financial hardship.

A cosigner is really a co-borrower, so a cosigned note will appear on your credit report.

That could make it harder for you to get a loan of your own, so you may want to decline a cosigning request if you’ll be applying for a mortgage or car loan in the near future.

Late payments will also show up on your credit report; a string of late payments could hurt your credit rating.

A default can create relationship trouble even if it doesn’t cause a cosigner significant financial pain.

How confident are you that your friend, sibling, parent or child will repay this loan?

Remember that the primary borrower wouldn’t ask for a cosigner if the bank were willing to issue the loan without one. Find out why the bank is hesitating.

Even though the borrower may be your best friend or your mother, look at a credit report -- it will show the borrower’s track record for paying off other loans --and at the person’s bank records, budget and other personal financial information.

Once you’re convinced that your friend or relative is a good risk, you should still take steps to protect yourself.

If you’re cosigning a mortgage or vehicle loan, consider drafting a written agreement that would force a defaulting borrower to sell the property and put that money into loan payoff.

Keep track of loan payments so you’ll know the borrower is making them on time.

Ask the bank to put the loan solely in the primary borrower’s name if that person’s income or credit improves.

If you’re not convinced that the borrower can afford loan payments, you may still help by giving a cash gift.

Current tax laws let you give up to $13,000 -- $26,000 for couples -- annually to any individual without incurring gift tax.

Recipients can put your gift toward a down payment, decreasing the money they’ll need to borrow and increasing the chance that they’ll independently qualify for a bank loan.

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