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Co-Signing - Before You Co-Sign a Loan

A Signer's Perspective

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Co-signing happens when somebody promises to back up a loan for somebody else. Somebody may ask you if you’ll co-sign a loan for them. They’re asking you to become legally liable to pay off a debt if they are unable to pay it off themselves. This page discusses co-signing from a co-signer’s perspective.

Co-signing a loan is a generous thing to do. You can help somebody you care about get a loan. Perhaps you’re helping them reach the goal of home ownership, start a business, or get through tough times. This is a huge favor that can improve somebody’s life.

Risks of Co-Signing

While co-signing can be wonderful, it’s also risky. As a co-signer, you take responsibility for the loan. If the loan is not repaid as agreed, the lender will come after you. They’ll demand payment from you and report any problems on your credit reports. There’s a good reason that the lender requires a co-signer in many cases: because the borrower appears likely to default. If you co-sign, you must believe that the lender (who probably makes more loans than you do) is mistaken.

Remember that the borrower doesn’t have to drop off the face of the earth for you to get into trouble. If a single payment comes late, the lender may come straight to you. They follow the path of least resistance – they can call you first if they think you’ll pay sooner than the borrower. However, they might not call you until things get really bad.

If the borrower fails to pay as agreed, your credit can suffer. A loan that you co-sign for ends up on your credit reports – the good, bad, and ugly. Late payments that weren’t your fault will appear as if they were your own problem. You get to choose whether to pay the lender yourself or to let your credit suffer.

Another pitfall of co-signing is that it makes other lenders think you’re borrowing more than you are. They know that you’re liable for your friend’s debt, so they assume you’ll have to pay it. They may think you have more dollars in debt than you really do, or that your monthly obligations are greater than they really are. This can affect your ability to get a loan of your own at some point.

How to Co-Sign

If you must co-sign for somebody, do it wisely. First, consider the alternatives:

  • Can you gift them the money instead?
  • Can you help them get a secured loan?
  • Can you privately lend them the money?
If co-signing is the right choice, limit your risk. Make sure you:
  • Get online access to the account
  • Get duplicate statements sent to your home
  • Request that the lender contact you immediately if anything is fishy
  • Get your name off the loan as soon as possible

It is difficult to get your name off a loan you co-signed for. In most cases, the borrower has to refinance the loan, pay it off, or see a substantial improvement in credit quality. Even if one of these options is a possibility, the borrower may not be willing to get you off the loan. There are plenty of horror stories about uncooperative children, ex-spouses, and ex-friends who refuse to get a co-signer off their loan.

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