Thursday, April 29, 2010

3 Reasons Why You Should Never Co-Sign a Loan For Someone Else

If a family member, friend or spouse wants to take out a loan, you might assume that you’d be doing them a favor by agreeing to have your name on the loan as a co-signer. If you’re a parent whose child asks you to co-sign a loan for them, it can be difficult to refuse. It may be hard to say “no”, but you need to think about your own financial situation, because you could find yourself in a lot of trouble if the primary signer has trouble making the payments. Here are 3 reasons why agreeing to co-sign a loan is a bad idea.

1. It becomes your responsibility if repayments are’t kept up. When you co-sign a loan, you’re agreeing to pay the loan on primary signer’s behalf if they fall behind on payments. Having a co-signer wouldn’t be necessary in the first place if the primary signer was capable of getting a loan by themselves and this alone makes it likely that you’ll be the one who pays off the loan in the long term. Don’t be surprised if creditors come after you if they can’t get the payment from the primary signer, especially if your track record with credit is much better. If the debt goes to collection, you’ll be the target for repayments. They don’t care who comes up with the payments just as long as someone does. If you don’t want to be stuck paying for their debt, don’t even consider becoming a co-signer.
2. Your credit rating is affected. Even though it’s not your debt, missed or late payments are included on your credit report as though you’d missed them yourself. If the primary signer defaults on the loan, it could do untold damage to your credit rating.
3. It can stop you from getting future credit. You may not be the person who actually applied for the loan, but becoming a co-signer means that it is taken into account when you try to get credit of your own. This impacts how much you can borrow, which can vary significantly if you want to be approved for a mortgage further down the line.
It’s tempting to agree to co-sign for a loan if someone close to you is doing the asking, but before you jump in, think about the damage it could do to your finances. Remember that as a co-signer, you’d be agreeing to take on the full loan if the primary signer finds that it’s more than they can handle. This could happen out of the blue with little or no prior warning and it would then become your debt. Even if the primary signer is responsible with credit and money in general, financial troubles can suddenly occur due to things like unemployment and medical expenses and as a co-signer, you would have to be prepared to deal with the aftermath.
Even if the primary signer never actually passes the loan onto you, the very fact that you’ve co-signed can mean that you’re refused credit for yourself. Co-signing a loan is incredibly risky and it’s not something that we advocate at Money Crashers because of the potential to end up in big debt that you’ve not personally racked up and the emotional distress it can cause between you and your friend or family member.
What are your thoughts on co-signing a loan for someone else?



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