Life happens – which is why you need to have a solid co-signing process in place to protect your financial independence and autonomy. Recently, we debunked three common myths you’ll encounter from various financial strategists around the field. In the spirit of providing more clarity and confidence around your current financial strategy, we thought we’d take it a step further and tackle the frequently asked question:
Is co-signing on a loan for a loved one worth it? And if so…how can you keep yourself financially stable and “safe?”
Read on to learn more about our top strategies for co-signing a loan – allowing you to keep your financial security and strategy intact.
Is it worth it to co-sign a loan?
Co-signing and lending requests happen, whether from close friends, loved ones or immediate family members (like your sons and daughters). This generally will happen before large life purchases, such as a vehicle or a home. Co-signing can help those without strong credit or financial history, essentially adding a second person who would be responsible for repayment and adherence to the contract terms in the case that the loan was defaulted on. In this sense, it is worth it, as you’ll be able to help the requester to secure their asset.
However, it can have consequences – such as credit score reduction if the primary borrower defaults on the loan. This is one of the many reasons that certain financial specialists will advise you to avoid co-signing or lending directly to friends and family members. However, sometimes the situation is unavoidable – or you may be willing to take on a certain amount of risks for the benefits that your liquidity could bring others.
Top tips for co-signing or lending
No matter what your reasoning is behind the loan or co-sign, we recommend a few tips to help keep you as risk-free as possible throughout the process:
- Be selective. It’s always better to co-sign or lend to very close friends, family or connections with whom you can be honest with. You’ll need to talk openly about finances, boundaries and other related topics during the lending process, and being close is the first step to a strong lending experience.
- Review the contract. Never go off of secondhand information. Reviewing the contract yourself can help to ensure that you have a stronger overall lending experience.
- Have a secondary agreement in place. Consider coming up with your own “contract” or verbal agreement around repayment terms, collateralization and check-ins to ensure that the investment is as protected as possible. You can do this neutrally and in a respectful way, working in a partnership with the recipient to ensure that both of your interests are protected.
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Looking to take the “next step” in your financial strategy? Consider reaching out to the team at Money Insights. Our experts have had years of experience helping high-performing individuals such as yourself move from a place of high income to high net worth – a transition that yields returns for a lifetime. For more information and to get started today, please connect with us. We look forward to speaking with you soon!