When you are considered an excellent risk as a co-signer for someone else’s loan, then it shows that you have been personally responsible with your own financial dealings. You will have a high credit score and a sound financial reputation. No doubt you have built this up over time and have assets which you value. If you are approached to co-sign a loan for a third party you are entering risky territory.
The most risky element of becoming a co-signer is that you are allowing someone else the opportunity to damage your own financial reputation, as part of your fiscal responsibility will be out of your hands. You become responsible for the actions of a third party which could have far more implications than you may have considered.
Let us assume that it is a relative who approaches you to co-sign a loan. By endorsing a loan you are taking on the loan as your own, effectively, as if the relative cannot or does not make a payment you are liable for their debt.. You are also liable for any late payment fees or charges, even though the bank wasn’t obligated in the first place to let you know there was a problem. Any late payment is recorded on your own credit history downgrading your own credit score.
Your credit report will show this loan as your liability. This will be looked at if you need to apply for credit yourself. If the relative is unable to make payments to the loan through illness, loss of job, death etc then you have guaranteed to assume the payments and must do so by law. Consider the risk if your own financial circumstances should change in a similar way and the relative has defaulted on the loan.
If you hit hard times yourself and are suddenly struggling, your own assets could be at risk on the relatives’ loan. Their loan could even be made a priority debt over any of your own, if the relatives’ lenders take legal action to recoup the debt from you.
There are so many risky scenarios if you agree to co-sign a debt for someone else that it really is not financially prudent to do so, and you should never feel obliged to take on this commitment for someone else. There would be less risk if you have the funds in place to repay the loan in full if necessary, or if you are confident you would be comfortable taking over the monthly payments, as this is what you are agreeing to do as a co-signer.
The only time it may be prudent to become a co-signer is to assist your child in obtaining a student loan, but that is a risk which only a parent can feel confident in taking. Even then you should check if there is the future possibility of being released from your responsibility as a co-signer, when college is completed and the student has their own credit history.
Never feel obligated to become a co-signer as it is indeed a risky thing to undertake. You are effectively offering a third party the chance to have a negative impact on your own financial reputation. If there is any question at all of your not being able to assume full responsibility for the loan then say no. Do not succumb to pressure to do something which carries so many risks. After all it is doubtful that the person’s life depends on securing the loan, but your financial standing could be.