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Q: A good friend of mine is taking out a car loan and needs a reliable co-signer. She asked me if I would do this for her but I’m a little nervous. Should I do this?
A: Cosigning for any loan can be risky. When you co-sign for a loan, you are promising to take over payments if the person applying for the loan cannot (or will not) pay. If taking over these payments would prevent you from paying your other bills, you should not cosign. You don’t want to lose your house just because your son couldn’t pay his car payments.
You may think, my child/neighbor/friend is trustworthy. He won’t just stop paying his car payments. This may be true, but the reason lenders require a cosigner is because the person applying for the loan is statistically risky. People of their age or income or credit history have a record for defaulting (not paying). If the bank, which knows a thing or two about money, doesn’t want to take on this risk, would you?
Sometimes, though, you feel that it’s necessary. Your daughter needs a car to get to work. You have the money, so you’re not worried about having to make the payments. You trust her. You know she won’t abuse your generosity, and will keep paying as long as she has a job. In this case, it can be all right to cosign. Make sure the person you are cosigning for knows the risk involved for both of you, and ask him or her to notify you the moment (s)he misses a payment. You can also ask the lender (in writing) to notify you of a missed payment.