Endorsing a Bank Loan

When a relative or friend is unable to obtain a bank loan, without the assistance of a third party endorsing the loan, the bank could well have good reason for needing a co-signer. If you are put in the position of being asked to endorse a bank loan for someone else you need to know why they need their own loan co-signing and why they are not considered a good risk alone. Alarm bells should ring though if the bank has doubts.

The usual reasons why endorsements are requested are that a person has previously had a bad credit history which they are trying to repair. This is a high risk area for you to become involved with as once a person has demonstrated financial irresponsibility they are more likely to do so again. Perhaps the person has no credit history of their own, so you could perhaps advise them on ways to establish one. This way they can learn to be financially responsible and build up their own credit history. The other possibility is that the person may be able to secure a loan but will be able to obtain a more preferential interest rate if the loan is co-signed. You need to consider these things, as well as knowing what your full obligations would be as a co-signer.

The responsibilities which you assume by endorsing a loan are in reality the same as if you took the loan yourself. The difference is that the bank is not obligated to inform you of any late payments made to the loan, but it has the legal right to pursue you for them. You could face extra charges for late payments incurred, even though you had no warning at the time that late payments were being made. As the loan is listed as a liability on your credit file then naturally any late payments to the loan will be recorded there, and thus have a detrimental impact on your own credit score.

If the borrower cannot make payments through an adverse change in their circumstances you will be expected to assume all payments on their behalf, so before endorsing any such loan you must ask yourself if you are willing to do so and if you are able to do so. If the answer is no to either of these points you should not consider endorsing the loan in the first place.

If you are considering endorsing the loan it is imperative that you are aware of all the terms of the loan, the length of repayment, the interest rate and terms, and any additional fees. There is a huge difference between endorsing a short term loan for a relatively small amount than effectively assuming a ten year term. Consider what assets, if any, you are asked to provide as collateral.

It is possible you would consider endorsing a third party loan but never do it for someone who has already shown they are a bad credit risk. This is completely different to helping out a grown child who has already shown to you they can be financially responsible but have not had the opportunity yet of establishing their own credit history.

If you decide to endorse a loan make sure it is for someone you know extremely well, who will fully understand the position you are putting yourself in. Discuss with the bank the possibilities of receiving statements of payments to the loan or to be informed if it looks like a problem is beginning, so you can step in early to put things right. Ask about the possibility of being released as a co-signer and what terms the borrower would need to meet before this becomes a reality. Get as much as you can in writing from the bank outlining your responsibility towards the loan.

Endorsing a loan is a decision only you can make by assessing all the circumstances. Never commit to this if you feel pressured by the third party, but uncomfortable with it. If you end up resenting the responsibility you have taken on, or even worse the repayments, it could have a negative affect on your relationship with the person who asked for your endorsement. If the relationship is dependent on your financial help you could well be better off without it.