Are Loan Co-Signers Saps?
Has anyone ever asked you to co-sign a loan? Did you agree? Either way, please share in the comments your rationale and, if you did co-sign, how things turned out.
What’s a Loan Co-Signer?
If your credit score stinks, first off you need to read volume 3 of my Simple Guides, “Raise Your Credit Score the Right Way”. 🙂
Loans are tough to come by if your credit score is in the dumper. But often a lender will extend a loan if you can recruit someone with a good credit score to “co-sign” the loan document. That means you sign on the dotted line and your
sucker friend signs too.
That makes you both equally responsible for repaying the loan. That’s a good friend you have there.
What Are the Statistics on Co-Signing Gone Bad?
CreditCards.com surveyed a couple thousand U.S. adults about loan co-signing. Here’s what the survey revealed:
- 38% of the co-signers had to pay back some or all of the loan
- 28% of the co-signers experienced a drop in their own credit score due to late or non-payment
- 26% of co-signers said their relationship with the borrower had taken a hit because of the experience
Those stats will stop and make you think about loan co-signing, huh.
What Can Happen When You Co-Sign a Loan?
Often co-signing works out fine. Another way to look at the survey results above is that 62% of co-signers didn’t have to repay any part of the loan. Apparently the borrower with the poor credit met their loan obligations.
Here’s the main thing you must understand: When you co-sign a loan, you are legally responsible for the debt. All of it.
Some other tidbits you should mull over:
- If the person you’re aiming to help out misses loan payments, the amount of the debt and the poor payment record may become part of your credit history, dinging your credit score.
- If the loan goes into default, your credit score may really be walloped.
- If the borrower doesn’t pay, ultimately the creditor will come after you for payment. Refuse and you could be sued and subjected to garnishment and liens.
Know the Risks Before You Co-Sign
I’m not here to tell you never to co-sign a loan. That’s up to you. When even the most honorable young adult kid on the planet launches into the real world but with no credit history, she’ll have trouble getting credit. It’s tugh in these situations for Mom & Dad to refuse to help by co-signing, say, a car loan. (I certainly would, if I liked my kid. 🙂 )
On the other hand, if your alcoholic, jobless, once-bankrupt brother wants you to co-sign a car loan so he can replace the one the police impounded, a little backbone may be in order!
But before you co-sign for anybody, 1) do understand the risks, 2) make sure the borrower knows what happens to your credit as a co-signer if she doesn’t pay, and 3) ask whether there’s a way for your obligation as co-signer to be removed after a certain portion of the debt has been repaid and maybe your friend builds a bit of a—stellar, right?—credit history.