Cosign a Loan and you Risk Inheriting Debt

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Why would an individual need a cosigner? Generally a lending institution requires this stipulation if they do not feel an applicant meets their basic credit qualifications. These qualifications are referred to as the five C's of credit.

• Character. The borrower must possess an air of responsibility in regards to repaying the loan.

• Capital. An amassed amount of money that shows loan payments will not be in jeopardy if financial circumstances change. (2) If you are borrowing for a business the lender will look to see if you have invested any of your money into the company.

• Capacity. The applicant must be financially able to make the loan payments. The income must come from a stable source.

• Collateral. Something that is used as a form of security to cover the cost of the loan. This is often times a house or a car.

• Conditions. The financial climate is taken into affect at the time of the loan application.

If an applicant does not meet these standards to the lender's satisfaction than the loan request is denied. However, the lender may agree to lend the money in the event that a qualified individual will agree to cosign the loan. When deciding whether you should agree to cosign there are a few questions that need to be considered.

• Why was the individual turned down? If the lending institution did not trust that them as a good credit risk should you?

• Can you afford to pay the loan? If the signer is not able (or willing) to make the loans you need to be able to fit the payments comfortably within your budget. If the added payments would send you into debt it would not be a wise idea to cosign.

• Do cosigners often end up paying the loan? Yes! Statistics show that as high as 75% of people who cosign loans end up being responsible to pay them off. (1)

If asked to cosign a loan the smartest move you can make is to politely decline. The alternative is to be prepared to assume the payment of the debt.

(1) http://www.sisip.ca/en/Articles_e/mar02sign_e.asp

(2) http://www.citizensbank.ca/menuId/60345

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.