5 ways to limit the risk of co-signing a personal loan

Last updated on November 25th, 2021 at 10:16 am by Bill Tsouvalas

Co-signing a personal loan can be a great way for borrowers who have a low credit score or bad credit to increase their chances of being approved. As much as there are many benefits that come with co-signing there are risks that could possibly make your situation worse. Here are five ways that you can limit the risk of co-signing a personal loan.

Do it with someone who is responsible

Agreeing to co-sign a personal loan is an important financial responsibility that needs to be carefully considered. If a friend or a loved one asks you to take out a loan on their behalf, this means that you will assume responsibility in ensuring that the monthly repayments of it are met. This is why it is vital that you sign a loan with someone who you trust and know is responsible because if they miss out on a payment you will be liable to pay out the full cost of the loan.

Fully discuss your expectations

It doesn’t matter whether you are taking a loan on behalf of your spouse or a friend whom you have known for years. It is vital that you have a detailed discussion on the expectations that you have when signing the loan. It is vital that you have a transparent discussion on how much each party is earning and what your current expenses to see if you will be able to meet the repayments on the loan. It is advisable to get a legal agreement that can ensure that you are protected should things go sour.

Consider the implications

Throwing financial responsibility into a personal relationship can be a recipe for disaster. Although it may not always be the case, it can cause turmoil in relationships which is vital that people assess whether taking out a personal loan with a loved one or friend is worth risking a potential relationship. If you know that the person who is asking you to co-sign a loan has a history of mismanaging their finances, or not meeting repayments on time then you will be better off not getting into a financial agreement with them.

There could be a lack of control

You need to consider the fact that you may have limited control in terms of the reports and updates that will be sent to the main borrower. It is their responsibility to keep you informed on these reports and updates. It is your responsibility to ensure that the person you are in agreement honours the agreement so that they do not default on payments which could heavily impact you.

It could affect your future borrowing

Keep in mind that should a person you are taking out a loan on behalf of can affect your future borrowing. If you plan on taking out a loan in future. Some lenders could deny your application due to you having too much credit in your name already. There is also the fact that if they default on payments it can be written on your credit report if you are unable to pay off the loan in full.

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