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It can be hard to see someone struggling financially, especially when that person is a family member. If you have the means to help, you may feel like you cannot say no. But while co-signing with a family member can be an immediate fix to a situation, it can also cause turmoil in the relationship.
Even if you can do it, co-signing might not be the best solution to a family member’s financial problems. It’s important to understand all the risks associated with the process before making your final decision.
It could negatively impact your credit report and creditworthiness. When you co-sign with a family member, you are telling the lender that you will step in should the family member be unable to, or refuse to, repay the debt. The debt will show on your credit report in addition to your family member’s, just as if you took out the loan yourself.
If you co-sign a loan with someone who doesn’t pay his or her bills, the damage to your financial standing could be far reaching. The other person’s failure to pay could result in accounts being turned over to collections, lawsuits filed against you, garnishment of your wages, or liens placed on your property. If you are not in the position to repay the loan or take over the payments on the loan should the primary owner of the debt stop paying on the account, these are real possibilities.
Your borrowing power could be limited. Another danger to co-signing a loan for someone else is that it could limit your borrowing power in the future. What if you decide that you want to consolidate your debt? You may severely hamper your ability to obtain financing should you have existing loans showing on your credit report.
If you are unsure and want to learn more about what your debt-to-income ratio could be while carrying additional loan payments for a family member, try this debt-to-income ratio calculator from ClearPoint Credit Counseling Services. It can help you determine if you are in an optimal financial position to co-sign on a loan.
Personal problems could develop. By co-signing, you are tied to this family member and their financial upheavals for the term of the loan. Whether it’s for six months or ten years, you are committing yourself for this period of time and will be responsible for repayment should your family member have financial difficulty. If complications occur, your relationship may suffer as a result.
Co-signing with a family member doesn’t necessarily mean your finances (or relationship) will be negatively impacted, but the fact is that family members may run into financial difficulty due to unforeseen circumstances. This could cause the person to default on the loan, creating problems for everybody involved. As with any financial decision you make, before you co-sign, be sure you weigh the consequences and have the facts.
Mechel Glass is the vice president of education for ClearPoint Credit Counseling Solutions. She is responsible for developing the curriculum and financial education materials for online classes including webinars, podcasts, videos, and listen-on-demand classes. She provides support and training for the agency’s community outreach programs and staff, including financial education specialists in 15 states. Glass also manages the development and reporting of the agency’s online education. She is the co-author of The Veteran’s Money Book to be published by Career Press in April 2014.
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