Co-signing on a loan isn't just the signature of your name. It is much more.

Someone you fairly trust, like a friend or cousin, asks you to co-sign on a loan. They assure you that the loan will be paid on time and in full. You are a nice person and sign the papers.

And then end up on Judge Judy or People's Court.

Co-signing a loan comes with a lot of risks. You need to know them before you turn a personal relationship into a business one.

Studies show that of all the co-signed loans that go into default, as many as three out of four co-signers are held responsible for the loan. That means that you have a 75% chance of having to pay the loan if your friend or relative doesn't.

Keep in mind that your friend or relative probably asked you to co-sign because he or she doesn't have the necessary credit required to get a loan. It doesn't really matter why the credit isn't there, it could be a lack of history or poor repayment history, but the most important thing is that the lender considers the borrower too much of a risk.

Think about that risk.

In fact, if you have good credit, the lender will probably come after you before going after the borrower. They already assume the borrower won't pay, but they believe that you have the funding and incentive to pay up.

In most states, you could be required to pay the late fees and attorney fees. You could have your wages garnished, your collateral taken or you could wind up in court. After all, you co-signed your responsibility to the lender.

Before you co-sign on a loan, you need to be sure that you can pay the debt if the borrower doesn't. No matter how sure you are that this won't happen, it could. People lose jobs, divorce, become ill or die. If that happens, you need to pay the loan to retain your good credit standing.

When you co-sign a loan, the debt will show up as a liability on your credit record. This may lower your ability to borrow money, as it shows you are responsible for an additional debt. If you are planning on purchasing a home, you need to take this into consideration.

Co-signing a loan is usually not a good idea. You have to have absolute trust in someone when helping them secure financing. One example of when this works is wehn co-signing on a loan for your child's first car or loan. This can often help your child establish a credit history. Although I have heard that credit agencies do not report on activity before the age of 18, my husband's report contains several small personal loans that were made before he graduated from high school.

When you co-sign on a loan, you need to have the lender agree in writing that in the event of default, you are only responsible for the principal balance of the loan. This prevents the lender for going after you for any legal fees, late fees or interest charges.

You should also ask the lender to notify you in writing when the borrower is late with a payment. This gives you valuable time to protect your credit.

You should have copies of all of the loan paperwork. You may need these in the future. And make sure you know the purpose of the loan, type of loan and the terms of the loan.

When you are co-signing on a loan, it is just as if you are borrowing money yourself. Treat it this way, cause you may have to pay it back.

Martin Lukac represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com, a finance web-company specializing in real estate and mortgage rates. We specialize in daily updates, mortgage news, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies! Article Source: http://EzineArticles.com/?expert=Martin_Lukac