The Dangers of Co-Signing
Did you know that the majority of people who co-sign a loan end up paying off the loan themselves? There can be many reasons why this happens, but it would probably happen a lot less if people really understood what it means to co-sign a loan.
Typically when a loan is co-signed, one person, who doesn’t qualify for the loan on their own, promises to make the payments. Another person, who does qualify, agrees to sign onto the loan, just to help their friend or relative. Many people who co-sign loans are under the mistaken impression that they share responsibility for the loan 50-50. Unfortunately, this is not true.
Co-signing someone else’s loan is the same as getting a loan yourself. The co-signer, along with the primary borrower, is each 100% responsible for the loan. If the primary borrower isn’t able to make the payments, then the co-signer must step up to the plate and continue the payments. This means that if you co-sign for someone else and they don’t make their payments as agreed, not only are you on the hook for future payments, it will negatively impact not only their credit rating, but yours as well.
Many co-signers also don’t realize that they are 100% responsible for the co-signed loan at any time, as if it were their own. Thus, a lender will add the co-signed loan to the list of debts a co-signer has, as if they are making payments now. So a co-signed loan can prevent a co-signer from obtaining more credit. This could be a problem for someone if they want to buy a car but are declined for the loan because they have co-signed someone else’s car loan.
The chances that a co-signed loan will negatively impact a co-signer are very real. According to the US Federal Trade Commission, 50% of all bank co-signed loans result in the co-signer making payments. When a co-signed loan is done through a finance company, the co-signer ends up paying 75% of the time. Canadian numbers are likely quite comparable. Co-signing a loan is risky business, as there’s likely a pretty good reason the primary borrower didn’t qualify for the loan on their own.
Someone should only co-sign for someone else if they are willing and able to assume the other person's loan payments. If you are asked to co-sign a loan, you should also ask yourself if your relationship with the other person will be damaged if they are not able to make their payments and the payments fall on your shoulders. Or, if you’re thinking of asking someone to co-sign for you, ask yourself this same question.
At the end of the day, if you co-sign a loan, consider it to be your own, and if you can’t afford the extra payments, don’t become the co-signer.