The Dangers of Co-Signing a Loan, Credit Card, Cell Phone Contract, or Mortgage
Has a friend or family member asked you to co-sign a loan, credit card, cell phone contract, mortgage, or other type of credit for them? When someone’s credit prevents them from borrowing money on their own, co-signing might seem like a good way to help. But there are dangers and risks to your own credit if you do.
Know these points about co-signing to avoid making a deal you’ll regret:
If You Co-Sign, the Whole Loan is Your Responsibility
Co-signing someone else’s loan is the same as getting a loan yourself. The co-signer, along with the primary borrower, are each 100% responsible for the loan. If the primary borrower can’t make the payments, then the co-signer must step up to the plate and make the payments. This might mean that the co-signer keeps making payments until the whole loan is repaid.
Many people who co-sign loans think they’re only 50% responsible for the money. This is false. Co-signers also often believe that their friend or family member will make the payments by themselves. While this might happen, keep in mind that there’s a reason why this person couldn’t borrow the money on their own.
There are many reasons why someone might not qualify for a loan, credit card, cell phone contract, line of credit, mortgage, or other type of credit. However, no matter what that reason is for your friend or family member, if you decide to co-sign for them, then make absolutely sure that you can afford to make their payments yourself at a moment’s notice.
Co-signing Affects Your Credit Rating Too
While it may be obvious that taking out a loan will affect your credit rating, what isn’t as obvious is that co-signing does too. Lenders look at your co-signed loan as if you took it out for yourself. This means that if your friend makes all the payments as agreed, this will be good for both of your credit scores. However, if they make late or partial payments, it will be bad for both of you.
Your Ability to Borrow Money is Affected If You Co-sign for Someone Else
Your ability to borrow money for yourself is affected when you co-sign for someone else to get credit. This is because a co-signed loan is treated as if you had borrowed the money for yourself. When you apply for your own credit, lenders will consider the fact that you could have to make payments for the co-signed loan at any time.
The bottom line is that co-signing for someone else could get your own application for credit declined, which could set your financial goals back.
How Much Debt is Too Much? How Lenders Decide
Co-Signing Might Ruin Your Relationship
When friends or family members are in financial trouble, preserving your relationship can help them through a difficult time. If they want to rebuild their credit rating and you’d like to help them, find a way to provide support without impacting your relationship. Broken promises and shattered trust are never easy to recover from, especially when money is involved. That’s why you should only co-sign for a friend or family member if you’re willing to carry their burden and make all their loan payments for them. It must also be a burden you can afford.
Unfortunately, the chances that a co-signed loan will harm a co-signer are very real. The US Federal Trade Commission once reported that 50% of all bank co-signed loans resulted in the co-signer making payments. When a co-signed loan was done through a finance company, the co-signer ended up paying 75% of the time. Canadian numbers are likely similar and behind those numbers are countless ruined relationships.
Get Help to Know When Co-Signing a Loan is the Right Answer
The dangers of co-signing a loan, credit card, cell phone contract, mortgage, or other type of credit cannot be ignored. At the end of the day, if you co-sign for credit, consider it to be your debt, and if you can’t afford the extra payments, don’t become the co-signer. If you’re still not sure and want personal advice, or to explore other ways people can get financial help, contact a non-profit credit counselling organization in your area. A professional credit counsellor will help you review your or your loved one’s unique situation without judgement. They will give you the information you need to make the right choices for reaching any financial goal.