Has a friend or family member approached you, asking for you to co-sign a loan for them? If you have, you will want to read this before signing on the dotted line. If you haven’t been approached, you may want to bookmark this post to come back to when you do get approached.
What Does Co-Signing a Loan Mean?
First off, understand that the lender is the one asking the borrower to find a co-signer for the loan. In the lender’s eye, they are not confident the borrower can repay the loan. The borrower has two choices: find a co-signer, or delay the loan while they work to improve their finances so that they can obtain the loan without a co-signer.
By co-signing the loan, you are taking responsibility to repay the loan should the borrow default or fail to make timely payments. Put another way, you are assuming the debt should the borrower not repay the loan. For example, let us say you co-sign a new car loan for me. The monthly payment is $400. After three months, I stop making the monthly payment. The lender will now come to you to get the $400 monthly payment.
Things To Consider Before Signing
First off, take you emotions out of the equation. The person asking you to co-sign may be your best bud or your sister, but you have to decide if you think they will be able to repay the loan. To help you with your decision, the Federal Trade Commission has shown that 75% of all defaulting loans are paid by the co-signer, not the borrower.
Another way to think about it is this: the bank makes money on loans through interest. They do not think the person is qualified to repay money it has lent this person. Why do you think this person will repay the loan? What are the chances they won’t? Have you seen behavior in the person that leads you to believe they won’t pay the loan back?
If the borrower defaults on the loan or is late with payments, it can (and most likely will), have a negative impact on your credit score and will show up on your credit report. If you are like me, you made it a point to be smart with your credit so that you can get the best terms and interest rates when you apply for credit. Don’t throw all of that down the drain by making a quick decision on co-signing a loan.
Another thing you need to consider is your available credit. Let’s say you are saving up for a house. While you are saving, you co-sign a friend’s loan. When it comes time to apply for a mortgage, you may be denied because you have too much outstanding debt. How can this be? Since you co-signed for the loan, it shows up on your credit report and has an impact on your debt to income ratio.
Dealing With the Borrower
It’s hard to say no to a friend or family member. But sometimes, saying no is the best thing you can do for them. Understand you saying no doesn’t mean you cannot help at all. Offer to instead sit down with the person and review their finances. Help them to get everything in order so that they can qualify for the loan. You will be doing them more of a favor in the long run.
Readers have you ever co-signed a loan? What were your experiences? Can you think of anything else to look out for or know when co-signing a loan?