If you do decide to say yes, make sure both you and the borrower are clear on the transaction's particulars. A loan must be treated as a business deal, even if you're lending to a member of your immediate family or your dearest friend. Prepare a written contract—it can be a simple one-page promissory note—that details the terms of the loan, including the amount they're borrowing, the interest rate, and the payback period. You can download a basic promissory note at Nolo.com.
You should also think carefully before cosigning a loan—no matter who is asking. Cosigning is a huge financial commitment: If the primary borrower can't keep up with the payments, you're guaranteeing to the bank that you'll step up and take responsibility for the debt yourself. And make sure you fully understand the effect this obligation can have on your credit. If the borrower is 30 days late on a payment, there will be a 30-day late payment on your credit report, too.
Ask yourself why the person needs you to cosign. Is it because she has lousy credit? That's a major red flag. Or is the lender asking for a cosigner because of the large loan amount? For example, is your recent-college-grad son trying to land a car loan beyond what his salary can safely cover? If so, your parental job is not to cosign but to help him see that he needs to shop for a cheaper car.
If you do cosign, feel free to attach some strings. Ask for proof that the payments are being made on time—have the borrower set up an automatic payment from her bank account each month, and then have a confirmation of the payment sent to you. You've given the borrower a tremendous gift, and you deserve the gift of peace of mind in return.
Next: How to give generously and intelligently
More Advice from Suze
- How to avoid the common emotional pitfalls of mixing family and money
- Get the 411 on your 911 fund
- 7 deals you should never make
- Can anything be done about a botched inheritance?
- 9 small financial steps that will pay off big in the future
Ask Suze your questions about debt & saving money
Suze Orman's most recent book is Suze Orman's Action Plan: New Rules for New Times (Spiegel & Grau).