The recent freeze in the credit markets has made it impossible for many people to get credit extended to them. In an attempt to keep customers, many banks and other lending institutions are requiring these people to get a co-signer before extending them credit. For many people, this means being put into the awkward position of being asked to be a co-signer.
The most important thing to keep in mind if you are approached to be a co-signer is that you can be legally responsible for the debt your friend or relative is taking on. For many people, that’s enough incentive to refuse. If you are considering co-signing anyway, consider these facts first.
1. A cosigner is responsible for the debt if the borrower cannot pay, regardless of the reason why. Even if the borrower has a good history of repaying loans, there is always a possibility of an event in the borrower’s life making it impossible for he or she to repay the loan. Even someone with excellent credit can be the victim of a debilitating accident. Even the death of the borrower will not prevent a creditor from coming after a cosigner for the debt. This is the main reason so many financial advisors and counselors tell their clients to never co-sign on a loan. If you do choose to co-sign for someone, consider your own ability to repay the loan if that individual stopped making payments. Some people choose to take out life insurance on the borrower just in case the unthinkable happens.
2. A co-signer does not receive a report on the behavior of the borrower. Sometimes, a co-signer receives a call from the lender after several payments are missed by the borrower with no prior notice that the borrower was having financial problems. While a lender can monitor a credit report to look for signs of financial trouble (carrying higher balances on credit cards, applying for a personal loan, etc.), the lender is under no legal obligation to report these findings to a co-signer. In fact, in many states it is illegal for a lending institution to share any information with the co-signer about the borrower.
3. The co-signer’s credit can be affected if the borrower is late or if he or she misses payments. Even if the borrower does not default on the loan, any late or missing payments can be reported on both the credit history or the borrower and the co-signer. In the case of a missed payment, a co-signer is sometimes threatened with this step in order for the lender to collect a timely payment from someone. Other times, a co-signer is blindsided when he or she discovers late or missed payments from a loan on his or her credit report months or years after they co-signed for an individual.
If co-signing is the only option for a friend or relative of yours to get money for an emergency situation, make sure you understand everything you are signing. Treat the loan paperwork like you were taking out the loan for yourself.