Rania Oteify
Special to Gulf News
To cosign or not to cosign? If you’re wondering, don’t. Cosigning on a loan is a huge liability, which could be as equal as or even worse than taking out a loan yourself.
Why? Because if you’re taking out a loan, you’re able to monitor your own payments and make sure you don’t fall behind. You also probably won’t take a loan unless you’re certain that you will be able to pay it back. And of course, if you’re taking a loan, then you’re the one who holds the property or collateral bought by this loan.
When you cosign on a loan, you only get the liability aspect. And if the principal signer defaults, you will be the first person to answer to the lender that will come after you for any outstanding payments. That is why it is best to take any request to cosign on a loan as seriously as you could. Keep the following points in mind.
Can you handle the debt?
Yes, if the principal borrower pays off the loan, you may never have to deal with this debt. But if this didn’t work out as expected, you’d liable for the debt, the interest, fees and penalties. So before you cosign, think of what plans you have in place to deal with this debt. The answer could vary based on the amount of debt.
Here is an example: your son is buying his first car that is relatively inexpensive and wants your signature to secure a loan. You know that your son is reliable and in the worst-case scenario you could let the bank seize the car or pay it off. In this case, go ahead and cosign.
In some other scenarios, you must pause and probably say no. For example, a friend is taking hundreds of thousands of dirhams in an unsecured loan to start a business. You don’t know the ins and outs of this business plan, and in case things don’t work out, you will have no way to pay off the loan. Protect your financial health – and your friendship – and don’t cosign.
Can you get out of it?
Relationships might end, but debt won’t go away. So if your spouse is financially irresponsible, don’t be dragged into debt that you may not be able to pay off even if you end the marriage. It may be difficult to say no when you’re in a relationship, but if it is a loan that you would not take yourself, you should not be cosigning on it.
In addition, falling in debt problems can put your own financial plans on hold. For example, if you appear to owe thousands of dirhams for a loan that you cosigned and now in some trouble, you’re less likely to get a loan yourself to pay a car or finance a home. In fact, in some cases, if you’re a co-borrower, this debt will count as your debt, which means it will count as part of your debt-to-income and can get in the way of getting additional loans – even if the principal borrower is making payments on time.
When to cosign
Go ahead and cosign if you know the borrower, know what the money will be used for, and you are sure that in the worst-case scenario you and the borrower have the resources – and the willingness – to work out a solution that minimize the impact on your financial standing.
You also should only get in such a financial agreement with someone who is likely to remain accessible in the long run. A coworker, a distant friend or your most recent flame are all not good candidates to provide this kind of assistance. So be ready to prioritize to family members and close friends.
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.
Cosigning dilemma
Avoid cosigning unless you’re certain
Think of the worst-case scenario
Vet the person and the situation
Understand the impact on your credit eligibility
R.O.
