Understanding what co Signing a Loan really Means

There is so much basic misunderstanding about co-signing loans that it astounds. To be able to co-sign a loan for a third party you need to have a high credit score of your own. Some people it seems have high credit scores without understanding the basic concepts of finance, or are just incredibly naïve. Maybe they just hate to say no, but most certainly most people have no basic understanding of what they are doing by adding their signature to a third parties loan application.

When someone asks a person to be a guarantor for their loan it appears to be the case that most guarantors have no actual idea that they are guaranteeing to be responsible for paying the loan if the other person fails to do so. Not only that, they bear equal responsibility for the loan until such time as they can be released as a co-signer which is not going to happen if the loan isn’t paid as per the agreed terms of the loan.

The issue is raised many times on the internet with people trying to warn others of the dangers of becoming a co-signer, and there are even threads on this subject in the Fico forums. Many people are angry that they have been left with a debt which is not theirs, having failed to understand the most basic point of endorsement. The debt is theirs, as they have signed to guarantee the payments.

They talk as if they have been duped and landed with a debt not of their own creation, rather than asking themselves why a co-signer was necessary. The obvious answer to this is that the lender did not consider the borrower to be a good risk, but the co-signer trusted the borrower above the lenders judgement.

It is sad to read of people who were settled and managing their own finances fine, to suddenly be lumbered with the debt of someone else, and sitting easy as the focus of collections activity. Their own credit score will drop due to this, and they probably won’t be able to get a loan in their own name to pay off the original loan which they co-signed for. However not too much sympathy should be wasted on their predicament as if they’d taken the time to read what being a co-signer involved they would not be in that situation. Many co-sign student loans which have a long term re-payment obligation which stretches out for years.

If you really want to help someone close to you obtain a loan then it is far better to either take a loan in your own name, and have the person make payments directly to you, or to simply gift the money. Unless you are certain you could pay the loan for the third party if necessary, and would be willing to do so, then endorsing a loan is not for you.