Everyone makes mistakes in life.  When it comes to financial mistakes the effects can literally last years, making it difficult to get a second chance even if you have learned your lesson.  There are millions of people who are trying to rebuild their credit after taking a few wrong turns only to learn that it is far easier and much faster to ruin your credit than the process of rebuilding it.  Sadly in these tough economic times people with a good history are finding it difficult to refinance or obtain new credit.  So what can you do if you or someone close to you has been denied credit?  One option may be to have a co-signer on the loan or credit application but before you take that step you need to understand the risks and responsibilities associated with co-signing a loan.

What Is A Co-signer?
Before asking someone to co-sign a loan or agreeing to be a co-signer on a loan it is important to understand what you can expect in terms of responsibility.  A co-signer is a person who accepts responsibility for repayment of a loan, credit card or other debt along with the original borrower. 

When Is a Co-signer required?
A co-signer is generally required when the original borrower has either bad credit or no credit at all.  A teen with a part time job or a young borrower looking to buy their first home are examples of situations which may require a co-signer.  If a person has had time to establish credit and made mistakes in the process resulting in a poor credit history, a lender may require a co-signer to increase the likelihood they will receive future payment. 

Co-signer Obligations and Risks.
The co-signer is sometimes referred to as a co-borrower or guarantor taking on the full legal obligations of the loan in the event the original borrower does not or cannot make the payments.  In short you are not just “vouching” for another person, you are in fact agreeing to make payments and fulfill the contract if the original borrower fails to do so.  When you co-sign a loan the information will appear on your credit report as well as that of the primary borrower.  This will increase your debt to income ratio and may make it harder for you to secure a loan or credit in the future.

The obvious risk in co-signing a loan is the financial burden in the event the original borrower defaults on the terms and conditions of the contract.  Unfortunately in most cases the original borrower and co-signer are either related or have a close personal relationship.  The real risk extends beyond the financial obligations and crosses over into how your relationship will be affected.  For that reason it is recommended anyone considering co-signing a loan should think long and hard before signing on the dotted line.