The risks of co-signing a loan

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Q. If I co-sign a loan, am I liable if they don’t make a payment?
– Helper, maybe

A. You seem to know you take on a lot of responsibility if you co-sign a loan.

It can be dangerous business.

A cosigner is an individual who helps a primary borrower get approved for credit when that primary borrower may not otherwise qualify, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

Green said some people are unable to take out credit of their own for several reasons, which include not having the income needed to cover loan payments, having a credit score that is too low or simply not having credit history.

“Whatever the case, if the primary borrower is unable to make payments for any reason, the lender will expect you as the cosigner to make payments,” Green said. “Whether the borrower lost a job, became disabled, passed away or just decided to stop paying — the liability transfers to the cosigner, who is then 100 percent responsible for paying the debt.”

While it is great that you want to help someone in this manner, Green said you should know that there are risks involved with signing on the dotted line.

If the loan does not get repaid as agreed, your credit will suffer along with that of the primary borrower, Green said.

“Late and missed payments will show up on your credit reports, your credit scores can fall — making it harder for you to get loans — you may be subject to higher insurance rates and you will likely pay late fees on top of those monthly payments,” he said.

If things are really bad, lenders may bring legal action against you, and these attempts to collect will appear on your credit reports, doing further damage, he said.

Lenders could even garnish your wages and take assets from your bank account if you do not make payments. This is not a risk to be taken lightly, Green said.

When you cosign a loan, you reduce the amount of your monthly income that is available for new credit, he said. This is because the full amount of the cosigned loan will appear on your credit report, and it will be as if you were the primary borrower.

“Although you are not actually borrowing — and even if you never have to make a single payment on the loan — this assumption of ownership can potentially limit you from buying a home, a new car or achieving another life goal that would involve taking on new debt,” Green said.

So if you co-sign, do it very carefully.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.