Posted on: 9 March 2017Share
Many small businesses begin by getting a loan from the bank. But if an individual doesn't have very good credit, they may not be able to get the favorable loan conditions they want. One of the most popular solutions is to get a loan co-signed — but family members should be aware of what this means for them.
1. Co-Signing Makes You Jointly Responsible for a Loan
Though it should go without saying, co-signing a loan also means guaranteeing the loan. That means that if the loan needs to be paid, you're just as responsible for paying it as the person taking out the loan. Not only does this mean that you could have creditors calling you later on, but it means that you could have judgments filed against you.
2. Co-Signing May Actually Make You a Larger Target
Most people believe that a co-signer is only there as a safety net. For the most part a co-signer will actually be pursued for payment before the individual actually taking out the loan. After all, the primary individual has already been found either not creditworthy or to not have the assets required to cover the loan. That makes the co-signer a more attractive target.
3. Co-Signing Adds Onto Your Debt
Because you've co-signed a loan, you will appear to have additional debt. That's because the debt is yours; you do have to pay it back if it isn't paid. That could hold you back from procuring loans of your own — and not just business loans. You might find it harder to get a car loan or home loan. Conversely, however, once the loan is paid back it will be a positive mark on your credit.
4. Co-Signing Can Hurt Your Credit
When your family member is late on their payments, your credit will get dinged as well as theirs. This could be concerning if you need to acquire credit for any reason soon. On the other hand, if you feel you can stay on top of the payments (and you don't need to use your credit any time fast), this could be negligible.
Though there are some things you may need to be concerned about, taking on a family business loan is very similar to any other loan product. If you truly believe in your family member and their business, there isn't any reason to hesitate — you should just make sure to discuss it with your personal financial adviser early on.
For more information, contact local professionals like American National Bank Of MN.