Co-signed loans are risky business because the obligation of the person co-signing is the same as the person who requested the loan. When bad credit, weak credit, or no credit history causes banks to request a co-signer for a loan, it is because they view the loan as risky themselves.
Because many potential co-signers view this request without looking at the bigger picture, they may help a friend or relative and destroy their own good credit in the process. The following points should be considered before signing on the dotted line on any loan. No one should risk their own credit standing without careful consideration of the possible consequences.
Obligations as a Co-Signer
On any co-signed loan, if the primary party does not pay his payment on time, the co-signer is expected to make the payment when requested. The responsibility for the loan is the same as if the money had been borrowed personally. A statistic that is worth considering is that as many as three out of four co-signers have to repay loans that have gone into default, according to the Federal Trade Commission.
Discuss Conditions of Co-Signing
Some banking institutions and loan agencies will consider releasing a co-signer from his obligation after the balance has been reduced to a certain level. Some banks will eliminate the request for a co-signer if a larger down payment is offered on loans that have collateral, such as car loans. Helping your friend or relative with down payment assistance can be much safer than being held responsible for the entire loan.
Credit Rating Impact
Any loan for which an individual is responsible represents a debt obligation that affects your debt to income ratio. This can be of major importance to anyone who might be considering purchasing a home or any other major credit transaction. A co-signed loan can block your ability to use your credit unless you have low debt to income ratios.
Co-Signer Protections
If you do co-sign a note for someone, make sure that the bank sends you copies of all statements to the primary borrower. You need to know if they are running late on payments because you might have to make that payment yourself. An explicit statement of your obligations as a co-signer should be received at the time of signing any documents. Regardless of verbal explanations by a representative, copies of all agreements must be saved.
Reasons to Take the Risk
Many parents help their children as they emerge into adulthood and try to establish credit. Sometimes, close friends seem to justify a helping hand. Whatever the reason, it can be a wonderful thing to do in some cases. It is also a risk that every person must understand. Being a co-signer is not just saying that you think that the person you are helping is a good guy, it is a guarantee that every penny involved in the loan will be repaid, by you if necessary.