5 Things to Consider Before Cosigning for a Friends Payday Loan

If you have good to excellent credit you are likely in a stable financial spot. However, you can easily ruin your credit score, as well as take a substantial hit to your bank account if you decide to co-sign a payday loan for a family member or close friend. In fact, a study done by the Federal Trade Commission indicated that 75% of co-signers ended up paying for the entire loan, this statistic is even worse for payday loans. On top of this, it is worthy to note that lenders will go after the person with the strongest credit first if a payday loan goes into default, which will directly affect your good credit score. For this reason following the general rule of “never cosign” is a good idea. However, it is understandable that it is difficult to say no to a family member or friend who is asking you to cosign a payday loan, and so here are five things to consider before you do so.

Knowledge is Key

It is crucial that you fully understand the weight of cosigning a payday loan. You are just as responsible for the loan repayment, and all activity on the loan will be directly reflected on your credit score. Due to this, it is key that you treat cosigning as a business deal, and sit down with your loved one to discuss all of the repercussions of not repaying the loan on time.

You Determine All of the Rules

Due to the fact you are the one with the strong credit score, you are also the one with the most to lose from cosigning a payday loan. This means that you have to dictate the rules to suit your needs.

Discuss it Fully

Before you agree to cosign a payday loan it is critical that you sit down with the co-signee and have an open and honest conversation. The bottom line is that you don’t want to regret signing on the dotted line at the end of the day, and so it is important to ensure that the co-signee understands that they are the ones who are gaining from having you as a cosigner, and that you are taking on a huge responsibility by agreeing to it. Even if you feel you can fully trust the individual you are cosigning a payday loan for, if they are in a bad financial situation then they might not be able to pay back the loan no matter how much they want to be able to. This would result in you having to deal with the full responsibility of repaying it.

Be Wary of the Negative Aspects

Once you have cosigned a payday loan there is rarely an opportunity to go back. Due to this, it is important to understand all of the negative affects of cosigning. For example, what will you do if you lose your job and are still held responsible for the payday loan? Also keep in mind that if your co-signee even makes a late payment you may be held responsible for paying the late penalties and fees that accumulate.

Create a Good Exit Strategy

If you decide to go through with cosigning a payday loan then it is crucial that you understand what the process is for removing yourself from the loan, and if it is even a possibility. There are some payday lenders that will allow you to remove yourself as a cosigner after the fact, however it is usually a very lengthy and complicated process, and will only be allowable if the co-signee has kept up with his or her payments.

loans - 27 Dec, 2013 - No Comments