My brother, who recently started a business, wants a specialized truck. He doesn’t have enough credit history to get approved for a $70,000 loan and has asked me to co-sign it. He is making enough money to cover the monthly payments.
What are the things I need to consider to make sure by helping him I am not affected and I am protecting my personal and family’s finances.
-------------------Hi Pippa,I'm so glad you're asking now before signing anything. It's good to understand all of the pros and cons of this situation. I can understand your desire to help your brother but you need to protect yourself and your family’s finances too. Generally, all the benefit from having a cosigner goes to the borrower and there's usually no benefit to the cosigner except feeling good about helping someone.
Here are some items to consider before you make this decision:
- If you co-sign, you are as much on the hook for the debt as your brother.
- If the loan payments aren't made, you will be expected to make them.
- If your brother is late on payments or misses payments, it'll be reflected on your credit report. You may also owe penalties, late fees, and additional interest.
- If the loan goes into default, the lender will seek you out for payment.
- Unfortunately, being a co-signer doesn’t give you rights to the truck. You’re simply a financial guarantor.
It's great your brother has the income to make the payments! That makes it more likely that you won't have to ante up unless his financial situation changes.Doing business with family could be a really good thing or a really bad thing. If the business struggles, this could be a source of tension between you and your brother. On the other hand, if it goes well, you could be the reason he was able to succeed.I think this is something you should be very careful about Pippa. It's a very large sum of money, it will be with you for a long time. Depending on the terms, it could wreck your finances in the event you have to make one or more payments.
If you decide to do this, here are some ideas that can reduce your risk.
- Require that your brother has sufficient emergency funds to cover any bumps in his life. The emergency fund should be 3-6 months of his expenses, including the truck payment.
- Have your name added to the title so you would have partial ownership. This is to protect you in the event something goes wrong and you're stuck making payments. Simply being a cosigner gives you no ownership or control over the vehicle. You would simply pay the loan for a vehicle you don't own, even if it's repossessed. If you're on the title, you could sell it if necessary. Once the loan is paid off you can remove your name from the title.
- Make sure there's sufficient insurance in place to cover all situations. Auto insurance, liability, and business liability are important. I would speak to your insurance agent to be sure your brother and you are fully protected against any adverse financial situations related to him, his business or the truck.
- Set up alerts so you know payments are being made on time. If they're not, you can take action before they're late and reported on your credit report.
- Write up a contract between you and your brother laying out the terms to make it an official.
- Plan for the worst and hope for the best. Make sure you have a plan in the event things don't go well. Do this before you sign anything.
I hope this gives you some ideas to work with!The most important thing is to be sure you're protected.