“Will you co-sign a loan?”
That’s almost like asking, “Will you marry me?”
Well, maybe not quite that intense. However, a marriage can end in divorce, while a co-signed loan can last forever.
A co-signer is generally needed when a person applying for a loan, say a car loan or student loan, doesn’t have enough credit, has bad credit, and earning a small income or no income at all.
It’s common for students to ask their parents or older family members to co-sign a loan with them. In fact, 90% of all private student loans in 2011 were co-signed, according to The Washington Post.
This can help them get approved and, in some cases, can even lower the interest rate. It does benefit the borrower, but at what cost to the co-signer?
You are throwing your credit on the table for them. And yes, it’s going to help them, but it also means your credit can be negatively affected.
Since you are equally responsible for whatever you’re co-signing, any late payment made is a negative count on your credit, too. So in addition to keeping track of your bills every month, you need to keep track of theirs as well.
Besides the fact that a missed payment could cause problems for you, the fact that you even have to worry about it can easily cause added stress for you and result in relationship problems.
If the person you’ve co-signed for doesn’t make payments, not only can you be held responsible, but in some cases, you’ll be held responsible first. According to Bankrate, if your credit is higher, they may assume you’re more likely to pay the debt and take action against you first. And it’s not that you’re responsible for just half the loan since there are two people. You’re liable for the whole amount.
Unfortunately, it isn’t just a matter of the borrower not making payments. If the person should die, you become fully responsible for the loan.
But even if the person is making every payment on time with no problem, it’s still going to affect your credit. If a bank is deciding whether or not to give you a loan, they can take into consideration that you’re technically responsible for a loan already.
If You Decide to Co-Sign a Loan
If you do co-sign a loan for someone, here are some ways to protect yourself, your credit, and your relationship:
Realize that you are being asked to guarantee this debt, that there is a chance you will need to pay it back, and that your credit could be negatively affected.
Thoroughly review all documents before signing anything so you fully understand and agree to the terms. Ask for copies of all the documents along with the account information.
Have an open and honest discussion with the person you’re co-signing for. Let them know your expectations. You’ll want to come to some type of agreement so you can confirm that the payments are not only being made, but that they’re made on time. Perhaps they can forward you the confirmation every month. If you don’t receive a confirmation prior to the due date, you’ll know you need to log onto the account to see what’s going on.
Bankrate recommends putting whatever the minimum payment is into a savings account each month. Once you have at least one year’s worth of payments, you can stop. This way, you’d be able to cover payments should your co-signer not pay.
Kiplinger suggests asking the borrower to close the account or refinance the loan as soon as their credit improves or they’re able to start earning more, so that your name is no longer associated with the account.
Finally, as you should be doing anyway, regularly check your credit report to spot any issues with the account.