How to minimize the risks of co-signing a loan

ATLANTA - It’s a serious decision to sign a loan with another person. On paper you get nothing out of it, but you have a lot to lose. Whether it's a car loan, or maybe a student loan, it doesn’t likely directly benefit you. But, if the other person doesn’t pay the loan, it does impact you. You are responsible for repaying it.

You might be compelled to help out if it’s a son or daughter with limited credit history who needs help getting a start, or if they’re still not making enough money to get a loan by themselves. But people with rocky credit histories might ask you as a favor to help them out.

Here are a few things you need to mete out before you agree to co-sign a loan. Who will make the payments? Seems obvious that it's the other person, but make sure it is actually clear. Discuss what happens if the other person can’t make the monthly payment. You may pay it, but how long will you keep doing that? Maybe you say three times and then the car is sold. At some point it might be good to refinance the loan in the other person’s name. Set a hard deadline.

The problem is that you can’t hold them to this. So it’s risky. But if you’re doing this to help your son or daughter get ahead, here are ways to stay ahead of problems.

Make sure you have access to the online account so you can keep an eye on it. Make sure the lender notifies you of any missed or late payments. Communicate regularly with the other person about the loan. Make sure they’re staying on track.

If you're thinking of co-signing a loan for an adult child, you could do practice runs. Buy their cellphone and have them pay you back monthly. See how they do.

But know, if you’re doing this for a friend, co-worker or distant relative, this financial relationship can ruin a personal relationship if things don’t go well.

Make sure that you can cover this loan if the other person can't because whatever happens will impact your credit score, too. 

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