Co-Signing
Co-signing puts you in a position where you apply for a loan with somebody else. Typically, you are helping that person get a loan that they would not be able to get without your help. By co-signing, you tell the lender that you'll personally make sure a loan gets paid back. Co-signing a loan is extremely dangerous. If you're going to do it, you should weigh the consequences heavily. You will be held responsible if the borrower you co-sign for fails to make payments in full and on time.
In other parts of this book, readers who are trying to build or rebuild credit are encouraged to ask another to co-sign for them. This can be a really touchy subject. Co-signing helps one person get a loan at the expense of risking the co-signer's credit. This section details the risks involved from the co-signer's perspective.
Why Would Anybody Co-Sign?
Co-signing is a really nice thing to do for somebody. Perhaps you've already heard that it's risky, but it happens all the time. Why? There are several situations where co-signing on a loan might make sense. In general, people co-sign as a favor to somebody else. We all hate to see others suffer, and co-signing on a loan can reduce the suffering of others.
Co-Signing for Children
Parents often co-sign loans and accounts for their children. This is a way to help the child start building credit and using credit products. Without a co-signer, your child might be stuck without access to money. If your child can get a loan, chances are that the interest rate will be higher than you'd like to see. How is a higher rate going to help your child get out into the world on the right foot? By co-signing, a loving parent can help a child get a better deal.
Before co-signing on a child's loan, parents should at least consider some alternatives. Generally, parents are trying to accomplish one of the following when they co-sign:
Help the child start using credit and understand the concepts
Get the child a first credit account
Buy a car and have the child make payments
Help a child rebuild credit after some hard times
While these are lofty goals, co-signing is not the only way to get results. Instead, consider giving money to your child, and keeping your good credit out of the equation. While you may not like the idea of giving the money away, you can structure things so that you're simply helping with the loan.
For example, let's say you're going to help your son get his first credit account and decide to co-sign on a major bankcard. If your son can't pay all the bills, the creditors will ask you to make up the shortfalls. What's worse, if payments come in late or get skipped, you might have negative entries show up on your own credit report. As you know, this will lower your credit score. Finally, the account could end up in collections, and this is a major black mark on your credit!
Co-signing is not the only way to help a child build or rebuild credit. With some creative thinking, you can simultaneously accomplish the goals of helping your child and protecting your credit. Before making a decision, discuss your child's basic goals and find a win-win solution.
What if you had helped your child get a secured credit card instead? You can walk into your bank or credit union with your child and open one up in just a few minutes. You make the original deposit that the bank uses as collateral. Next, the bank issues a secured credit card that your child can use anywhere.
This is a win-win situation for everybody: your child gets a credit card at competitive rates; the bank is happy because they have a new customer, and they're not taking much risk; and you have not risked one of your most valuable assets — your credit — helping your child learn some of life's hardest lessons.
Keep in mind, the world is unpredictable, and remember how you were when you were young. Try to keep your credit separate if possible.
The Secrets of Co-Signing
Co-signing puts you on the hook for another's debt. Most co-signers don't know that the lender can try to collect debt from you without taking all possible steps to collect from the primary borrower. Remember, lenders want to take the path of least resistance. If they have any trouble collecting from the person with bad credit, they'll go after the person with good credit.
According to the Federal Trade Commission, three out of four co-signers are asked to make payments on loans gone bad. These numbers should not be surprising. The bank already knew that the primary borrower was a risk, that's why they required a co-signer. If somebody needs you to co-sign, odds are good that you'll be asked to pay.
Co-signers are just as responsible for payment as the primary borrower. This includes lawsuits, garnished wages, repossessions, and penalty fees. Remember that repossessions and collections can stay on your (the co-signer's) credit report for up to seven years.
If You Insist on Co-Signing
Given all the risks, you might be reluctant to co-sign for anybody. However, there are occasions where you may feel that co-signing is the right thing to do. Perhaps you'll have a child or loved one in the midst of extreme challenges. If you decide to go down that road with them, take some steps to make sure you're protected. By staying on top of things, you can keep the situation from spinning out of control. Here are some ideas to help manage your risk:
Ask the lender how much it will cost if you have to pay off the debt
Get statements or duplicates mailed to your house so you know if payments are late
Get a written agreement that the lender will call you immediately if there is a late payment
Avoid pledging any valuable property, such as your home or auto, for the loan
If you sever your relationship with the borrower, get the loan refinanced without your name as soon as possible
If you do choose to co-sign on a loan, these precautions might not keep you out of trouble entirely, but they will help mitigate the potential damage to your credit rating.
