Co-signing a loan for someone may seem a simple enough matter: someone whom you trust and know well is unable to get a loan on their own, and they want something very badly, and one little signature from you can make it happen …
But co-signing a loan is fraught with pitfalls, and is worth the most careful consideration before you agree to it.
When you agree to co-sign a loan for someone who can’t get the credit himself, you aren’t agreeing to be half responsible for repayment. You’re actually agreeing to be 100% responsible, in the event the person applying can’t or doesn’t make the agreed-upon payments.
For young borrowers, a co-signer is often necessary because they simply don’t have the credit history or income to get the loan for themselves, so it’s common for parents to co-sign a loan for their children. Ask yourself some hard questions if another relative or a friend asks you to co-sign. What in their credit history is preventing them from getting approved for the requested amount of credit on their own?
Whether you qualify as a co-signer will depend on your own strong credit history, and just as if you were applying for the credit for yourself, you need to take a good look at how borrowing will impact your own financial situation. Co-signing impacts your available credit as if you yourself had applied for the loan, so that’s less credit you’ll have available to you should you need it yourself.
If the primary borrower defaults on the loan, can you afford to pay it back? Remember that if the primary borrower should declare bankruptcy, you will be held entirely responsible for repaying the full amount of the loan. Are you prepared to make even sporadic payments if the primary borrower can’t?
Although Canadian research is scarcer, the US Federal Trade Commission has said that 50% of co-signed bank loans result in the co-signer’s having to make payments, while co-signed loans through finance companies result in the co-signer’s paying 75% of the time.
Are you ready for the risk?