Being a co-signer on a personal loan is a financial matter that you should not take lightly. The fact that a person, who may be your family member or friend, is required to seek a co-signer is already something out of the ordinary.
First off, you should be aware that you will be equally responsible for the loan’s outcome and you may have your own personal loan to see to. Once you agree in being a co-signer for a personal loan, there is a great chance that your credit responsibilities will be doubled. Hence, consider the following courses of action to take before giving in to a request of being a co-signer on a personal loan:
1. Try to inquire about the past credit performance and determine if it was pure mismanagement on his part. Consider his and his family’s spending habits. Take note if there were any signs that they took serious actions to change their lifestyle or were they merely prevented because the cardholder’s obligation already caught up with him?
2. You should realize that if you agree in being a co-signer on a personal loan and your friend’s loan goes awry, it will create a rift in your relationship. Not agreeing in being a co-signer on a personal loan will only make the rift take place much earlier. You could probably ask your friend to wait awhile and make some adjustments in his and his family’s lifestyle and spending habits before plunging into another round of credit obligations.
3. However, if your friend or relative suffered due to a calamity, loss of job due to company shut down, illness or other such things beyond his control, perhaps you should consider agreeing in being a co-signer on a personal loan. You must go into this with an open mind that you may also have to extend loans yourself just to make sure that the credit account will be up to date in its payment.
4. If you will agree in being a co-signer on a personal loan applied by your son or daughter who is about to start a credit history for him or her self, you should first have a serious talk with them. Enlighten them with the basics of handling credit cards and the pitfalls to avoid. Inform them of the possible consequences as well as the importance of having a good credit score. Make sure your son or daughter understands all these before agreeing in being a co-signer on a personal loan they are applying for.
These measures however are not so much on the risks you face by being a co-signer on a personal loan. Most banks or credit unions will be the first to institute measures in minimizing their risks in credit exposures; albeit one of which is requiring a co-signer.
These types of cardholders are required to put up a deposit balance to cover for their credit limit in case they again fail to meet their obligations. The said deposit balance will be applied for whatever unpaid amount that falls due. Corresponding fees and penalty charges will be meted to make the borrower think twice before making a habit out of it. In order to continue with the use of his credit card, the cardholder will again be required to maintain the required deposit balance. This means that your risk in being a co-signer on a personal loan is minimized.
Besides, if the borrower does not have a good credit reputation even from the onset of his credit history, you will agree into a being a co-signer on a personal loan that is approved only for a very limited and secured amount. A normal deposit balance that secures a bad credit card is $500, but dependent on the credit history. Some credit card issuers may allow only 50% of his deposit as his credit limit or $300 thereabout.
The best thing to do therefore before agreeing or disagreeing in being a co-signer on a personal loan of a friend or family is to know the type of credit being availed and the reputation of the credit card issuer.