Before endorsing a bank loan for a friend or family member, consider the risk that is involved. As a third party endorser, you are equally liable to meet the terms of the loan as the person who solicited it. Stated simply, if they do not pay the note as called for, you will be expected to make the payment.
This warning is sometimes not heeded because everyone wants to be a good guy when approached by someone asking for a “small” favor. Truthfully, when banks or other lending institutions request a third party guarantee for a loan, they are considering the risk of the loan to be excessive.
Even when loans have some type of collateral, the third party is not protected by the collateral. The friend who did not make his car payments could drive off into the wild blue yonder leaving you with a note to pay off, and no car in hand to offset the loss. This is a great way to lose a friend, or the friendship of a relative if the worst case scenario occurs.
There are exceptions to every rule. It is possible that helping your child establish credit with a local bank by endorsing their first bank note is a good idea. With your involvement in their first credit experiences, you may help guide them in the area of developing good credit habits. If you already have negative experiences with them in areas of credit, a bit of tough love might be more helpful than an endorsement.
Becoming responsible adults is a different experience for every single young person. As a rule, the things that require the most effort are also the most valuable experiences in life. Anyone struggling despite having made good effort is certainly a worthy candidate for a helping hand providing that making the full payment of their note is not a problem.
Bankers love to offer loans based upon a qualified co-signer, and will sometimes agree to release the third party from the note after part of the note has been satisfied without any payment problems. This is a worthwhile condition of co-signing to investigate if your intent is to be helpful. By releasing you from the note after a year, for example, it is guaranteed that the remaining payments will indeed be credited to the history of whomever you are helping.
Above all else, consider the obligation of any endorsed note to be your own liability. You are legally responsible for every penny involved in the terms of the note. Forewarned is forearmed.