Treat Co-Signing a Loan Very Seriously
If a friend or family member is having difficulty arranging a loan, they may ask you to co-sign the loan for them. This is often the case with those who have damaged credit, are newcomers to Canada with no credit history, or have fluctuating income (such as self-employed freelancers or gig workers). When you co-sign a loan, you are “lending” your good credit to help the other person qualify for a loan they otherwise would not have been able to get. With your signature on the loan documents, they may even get a preferred interest rate.
When you co-sign a loan, you effectively promise to pay off the loan if the primary borrower is unable to do so. This means you could find yourself completely responsible for making all the loan payments on your own if your friend or family member defaults on the payments. This is an especially crucial point to understand and something we urge you to strongly consider before you agree to co-sign a loan for anyone.
While most of us are eager to help a close friend or family member out by co-signing such loans, it is important to take the process seriously and think about the ramifications clearly before signing those documents.
Here are some things you may want to consider before agreeing to co-sign a loan:
Find Out Why Co-Signing is Needed
If someone asks you to co-sign a loan for them, find out why they need a co-signer. Are they hoping to get a lower interest rate? Are they unable to get the loan on their own because they have damaged credit? This situation often happens with younger people who have just finished school. They may have a solid income, but they are unable to get the loan they want because they do not have a strong credit history.
Pay special attention to situations where a person needs a co-signer because they have poor credit. If they have missed payments over time or defaulted on loans in the past, this will hurt their credit score and make it tough for them to get a loan. If this is the situation you are faced with, you need to seriously think about whether you should be co-signing. Remember, you will be responsible for the loan payments if the other person cannot pay. And their history may suggest this could be a possibility down the road.
Check if Your Friend or Family Member Can Pay Off The Loan
It is important to have an honest conversation with the person asking you to co-sign. Do they feel they can make the payments on this loan? Do they have enough room in their budget to handle the loan payments? Do they have a plan for what they are going to do if they are faced with a sudden unexpected expense or emergency? These may sound like personal questions, but they are essentials things to discuss before you agree to co-sign anything.
Make Sure You Can Pay
Not only will you need to make sure that the primary lender can repay the loan, but you will also need to determine if you can handle the payments if you end up in a situation where you will be required to do so. If it would hurt you financially to have to make these payments, or if you are not sure if your budget can accommodate them, then you may want to reconsider co-signing the loan.
Know the Terms & Other Details of the Loan
Just like you should always make sure you read and understand the terms of any loan you take out by yourself, it is also important to know all the details of any loan you agree to co-sign. You could end up responsible for paying the loan.
It is also important to take note of the responsibilities of the co-signer, such as when you will be contacted or what circumstances may require you to make payments. Are there any penalties if the primary borrower defaults? Do you also have to provide your banking information to the lender, in case of default?
Consider The Impact On Your Credit Score
Any loan that you co-sign will appear on both your friend or family member’s credit report and your own credit report, even if you are not the one responsible for making the payments. This means any missed payments or past due payments will be reflected on your credit report, and this can negatively affect your credit rating.
Having this loan on your credit report may also affect your own debt-to-income ratio. Your debt-to-income ratio is the percentage of your monthly gross income that goes toward paying down debt. Lenders do not want to lend to people who are carrying substantial amounts of debt compared to their income, since they believe a person in such a situation is likely to overextend themselves financially. Since the loan you co-signed will appear on your credit report, it could be more difficult to get a loan for yourself in the future. That is because the lender may believe that you will not be able to handle making the payments on the new loan as well as the loan you have already co-signed.
Most co-signers are required to remain jointly on a loan until it is paid in full, or the loan is refinanced under the primary borrower’s name only. This means the co-signed debt could appear on your credit report for quite some time.
Take your time to decide if you will agree to co-sign a friend or family member’s loan as it a huge responsibility. We have helped many people over the years who found themselves on the hook for a cosigned loan or jointly held credit card when the original borrower defaulted, disappeared, or passed away. It is a serious decision and one that must be made only after weighing all the pros and cons.
If you have found yourself responsible for a co-signed loan that someone else defaulted on, the licensed insolvency professionals at Farber can help. Please CLICK ON THE FREE CONSULTATION BUTTON, below, or give us a call today right from our website. We can review your situation with you and recommend some strategies for dealing with the debt.