When you cosign on a loan, it’s always important to understand how the process works and what the ramifications are for your credit score if the borrower doesn’t pay back their loan.
What many people don’t realize, however, is that there are ways you can protect yourself from the situation getting out of control in the first place!
Here are five ways to protect yourself after cosigning a loan.
Get a copy of the credit agreement
If you plan on cosigning on a loan, it’s important to know what you’re getting yourself into. In order for the lender to be able to collect from you, they must take legal action against both parties.
This means that if the other person doesn’t pay the debt and defaults on the loan, then both of your credit scores will suffer.
You should also make sure that you have enough money in savings in case they default and don’t have enough money to cover the monthly payments.
One way to protect yourself is by asking for a co-signer release clause when the time comes to refinance or sell the property.
The clause would give you some protection by requiring them to get approval from the lender before selling or refinancing their own property.
Once approved, you would no longer be legally responsible for paying off the loan.
It may seem like common sense but it’s important to read all of the fine print before agreeing to become a co-signer.
Review the terms of the agreement
When you cosign on a loan, you are making a promise that the borrower will repay the loan. It’s important to read and understand the terms of this agreement before agreeing to it.
The more information you have, the better your decision-making process can be.
In many cases, lenders require borrowers to take out life insurance or purchase a co-signer rider for their home insurance in order for them to get approved for the loan.
If your loved one does not qualify for life or home insurance coverage because of their health or other factors.
It is crucial that they find an alternative means of securing these policies as soon as possible.
Your relationship with the person you’re cosigning for is strong enough that you may want to consider offering your own life and/or homeowners’ insurance policy.
Remember: Even if they don’t ask, it may be worth asking them how they plan to cover these requirements before committing yourself to being their guarantor.
You’ll also want to check what happens if the borrower becomes disabled or dies.
Do you know about Social Security Disability Insurance? SSDI is a program designed to help people who become disabled and unable to work through no fault of their own.
SSDI can provide monthly income and medical benefits for up to five years, including Medicare benefits once individuals reach age 65!
Make sure you can afford the payments
If you’re considering cosigning a loan for someone, it’s important that you can afford the payments.
Remember that if something happens and they are unable to make their payments, then you’ll be on the hook for them.
If you have enough savings to cover their missed payments, then cosigning may be right for you.
But if not, don’t do it! One way to get around this is by getting life insurance for the other person.
Another option is making sure there is sufficient collateral involved in case of default.
For example, if your sibling were going to take out a loan with you as the co-signer, you could require them to put up property as collateral or even set up an escrow account.
The more protection you put in place when doing so, the less risk there is for you.
Also, talk to the lender:
If you’re cosigning a loan, find out what will happen if the person doesn’t pay their bills.
It’s likely that there will be repercussions for both parties; but being aware of these before you agree to anything is key.
You want to know what types of actions will happen should there be some sort of mishap before agreeing to anything.
Monitor the account
Monitoring the account is an important way to protect yourself after cosigning a loan.
You can set up alerts so you know when transactions are being made, and if you notice anything suspicious or out of the ordinary, you will be able to contact the lender immediately.
Additionally, periodically checking your credit report for accuracy can help identify any accounts that have been opened without your consent in case someone has been using your information.
The more often you monitor your account and report, the less likely someone will be able to do damage to it without detection.
Be sure to also watch out for overdrafts; they may happen with your own bank account too!
So don’t assume just because you got an email notification that there’s nothing wrong with your account.
If you think something might be going on, double-check what’s happening by logging into your online banking portal.
Take action if the borrower misses a payment
It’s important to be proactive when it comes to protecting yourself after cosigning a loan.
If the borrower misses any payments, you should contact them and ask them what they plan on doing about the missed payment.
If they’re not willing or able to make their payment, you may want to consider calling the lender and letting them know that the borrower has defaulted on their loan.
This will allow them either help work out an arrangement with the borrower or begin foreclosure proceedings.
You can also monitor the borrower’s credit score as well as your own by requesting regular credit reports from each of the three major credit bureaus: Equifax, Experian and Transunion.
Remember that if your co-signer defaults on their loan, this will affect your credit score as well since you are legally obligated for all of their debts.