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Stop. Drop. And Read This Before Becoming a Co-signer.

There are many reasons to consider cosigning a loan. Your children need your signature to take out student loans to pay for college. Maybe your parents need money and have asked you to cosign since they were nice enough to bring you into the world. You might have a lifelong friend who has fallen on hard times and could use your good credit to help her get back on her feet.

None of this, of course, not even your parents playing the we-gave-birth-to-you card, necessarily means that you should cosign a loan. It's just understandable if you're thinking about it. Before signing on the dotted line, take a quick tutorial on what you're about to get yourself into first.

The argument for cosigning. It can be a brutal world out there, and you want to help someone you care about. That's a perfectly reasonable argument, and it isn't as if there aren't positive stories of cosigning a loan. There are.

"I have cosigned on two car loans, one for each of my kids. I have also given a loan on a credit card -- a cash advance -- to each of my kids: one for $22,000 and one for $4,300," says Janet Nast, a San Diego information technology professional and author of the self-published book, "Shifting to the Business of Life: A Survival Guide for Young Adults."

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Nast says the first credit card loan has been paid off. The other has $1,500 to go.

For Nast, everything worked out. It may have even helped her own credit. At least, she says, she was able to take out a personal loan for solar panel installation and to buy her own car while having cosigned loans.

"So it's all been good. I'm very fortunate to have good experiences in the world of cosigning," Nast says.

The argument against cosigning. The main downside is that if the loanee has trouble paying it off, that trouble becomes your own.

"When a person needs a cosigner, it is because the institution does not believe that the person has the ability to pay it back," says Debbi King, a personal finance and life coach in Quakertown, Pennsylvania.

"When you cosign for them," she adds, "you are risking your financial reputation and your relationship. Any payment that is late or missed will affect your credit score and theirs. And every time that you see this person, you will be questioning every money decision they make wondering how it will affect your loan."

It's easy to think in vague terms that, yes, if your co-signer can't pay, it'll be stressful for a little while, but human beings are an optimistic bunch. So if you figure you can take a hit to your credit score, remember: You could be in for more than a hit. You might take a beating.

Denise Winston, the California-based author of "It's Your Money: Avoid Costly Mistakes," and a former banker for 25 years, says the following will happen if the person you're cosigning for can't cough up the money to pay for the loan:

-- You will be asked to make the payments.

-- That person's credit mistakes become your own.

-- Future loans could be affected.

And your beating may actually last a few months or even years.

Yael Ishakis, vice president at First Meridian Mortgage in Brooklyn, New York, says a client of his cosigned a mortgage for his nephew.

"Two years later, the nephew was diagnosed with a terrible disease and is no longer able to work," Ishakis says. "The uncle couldn't exactly kick his nephew and family out in the streets and he has been paying their mortgage for them for the past 15 years. This is the kind of responsibility the banks expect of a cosigner."

Another reason to be at least be a little pessimistic: You may be thinking you'll just cosign until your son or daughter or friend sees their credit improve and they can refinance the loan or have you released as the co-signer. Last month, however, the Consumer Financial Protection Bureau issued a report finding that 90 percent of private student loan borrowers who applied to have their co-signer released from the contract were turned down. So if you're cosigning a private student loan, for instance, you have a 90 percent chance that -- at least initially -- you'll be attached to this loan for the long haul.

What you should do if you're going to co sign. If you're confident your cosigning story will be positive and not a horrific cautionary tale, there are steps you can take to help yield a good outcome.

For one, Winston suggests setting up email and text alerts to let you know when payments are due or are late, and to flag when the payment is posted.

If the person you're going to cosign for balks at that, it may be a sign that he or she thinks there will be trouble ahead.

Jim Angleton, president of Aegis FinServ Corp., a financial planning firm in Miami, Florida, would go even farther. He would try and arrange with the lender to be notified immediately before a default, so your credit isn't impaired.

He would also attempt to get the original person signing the loan to create a special bank account with a minimum of two months of payments and have the lender direct-debit payments from that account. You're at least ensuring that the person you're helping gets off on the right foot, though it's up to him or her to keep that account healthy.

For what it's worth, Angleton would be extra cautious about doing any of this with someone who isn't family. "Try not to cosign if at all possible for friends," he advises. "In most cases, it never works out and hardships occur that can ruin relationships."

Regardless, if you decide to cosign, see if there's a better, or almost as good, solution instead. King says, "Our son wanted us to cosign for an apartment for him once ... We wouldn't, but we helped him find a place [that] would take references and helped him come up with the security deposit."

Above all, make clear to your family member or friend just what will happen if things go south. Nast says she trusted her children implicitly and notes that they already had a history of paying money back before she cosigned loans for them.

"That said," Nast says, "I made it clear to both of them that if they missed one payment, it would screw up my credit, and as a result, I would have the bank repossess their car. They were properly scared, so I happily signed both their first car loans."

It worked. Within about two years, her kids not only made their payments, their credit improved, enabling them to refinance the loans in their own names.



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