Five Reasons Why You Shouldn't Co-Sign on a Loan
Your newly adult child is starting out on her own. She needs to buy a car to drive to work, but the bank won’t loan her the money without a credit history. She asks you to co-sign on the loan. Or she asks you to co-sign on her application for a credit card. You want to say yes to help her get a good start on her financial life.
Think again. Your name on that loan can have very serious financial repercussions.
The loan will appear on your credit report. When you co-sign on a loan, the lender usually will report you to the credit bureaus as being responsible for the full amount of the loan. This can make it difficult for you to get credit in the future if lenders think your debt load is too high. Your credit rating could be ruined in the event of default.
If your child misses a payment, the lender may come after you right away. After all, you are the one with the better credit, and more likely to be able to pay. If the loan goes to a collection agency, they will come after you.
If your child defaults on the loan, you can be sued. You may be responsible for the amount of the loan plus collection fees, late fees, interest and attorney fees. Depending on the loan agreement, you wages may be garnished or you could even lose your home.
You may still owe even if your child loses the car. If neither of you can make the car payments, the lender can repossess the car, sell it and come after you for the remainder of the loan if it is not covered by the sale.
If a borrower declares bankruptcy you as co-signer are not protected. With few exceptions, even if the borrower is able to discharge her responsibility for the debt through bankruptcy, you are still fully responsible for the entire debt.
It can be very hard to resist when you’re asked for help by a family member, especially to help a child starting out. But helping by co-signing on a loan is very risky even if your family member has a good job and is very responsible. The unexpected can happen – layoffs, illness, additional debt or disability – which can affect the borrower’s or your ability to repay.
If you still want to consider co-signing, be sure you can afford to take over the entire loan at any time. Be sure to read the loan documents carefully, especially the provisions for what happens in the event of default. If you have to put up collateral, be sure you can afford to lose it. Have a serious talk with the borrower about the importance of paying on time and the consequences if she misses payments or stops paying.
Treat the loan as if you are taking it out yourself, which in essence you are. You are signing a contract that makes you legally responsible for the debt. Get copies of all of the loan documents and be sure you understand all of their provisions. Ask the lender to notify you if payments are missed.
Finally, try to think of a better way to help out. Besides the financial risks of co-signing, there is a significant emotional risk involved. If your loved one defaults on the loan, it could leave your finances and credit rating in tatters. Even in a best case scenario, where you can afford to pay back the loan, your relationship can be permanently damaged.
Think again.
NOTE: The information you’ve obtained from this article is not, nor is it intended to be, legal advice. Consult an attorney for advice concerning your individual situation.