12/3/2012 4:15 PM ET|
Should you co-sign a relative's loan?
Here's what co-signing can do to your finances and how to protect yourself if you do decide to guarantee a family member’s loan.
During this festive season, we often spend more time than usual enjoying get-togethers with our families. The early, chilly nights coax us to spend more time indoors, hanging out with brothers and sisters and aunts and uncles and nieces and nephews.
Family bonds are strong. Most of us would do anything for family. So during family time this season, you might have a sibling pull you aside and quietly but politely ask you if you could co-sign a loan.
Requests like these put you in an awkward position. You might not want to co-sign anything, but the sibling is, after all, family, and his or her circumstances might be dire, so maybe you feel like you have no choice.
If you are thinking about co-signing for a loan, here are the credit implications you need to be aware of:
●Co-signing a loan is just like getting a loan. Don't make the mistake of thinking that it is some sort of secondary action that has no consequences for you.
●The lending company will pull your credit report. Every time your credit report is pulled by a lender, your scores go down slightly.
●Co-signing a loan will impact your credit scores if your relative pays late or skips payments altogether.
As the co-signer, you will be equally responsible for the amount owed. If your relative doesn't pay it back, you will need to do so, or face the consequences.
Co-signing is a serious responsibility. It's no different than applying for a loan for yourself. So take the request seriously and think twice about co-signing, even if it's a family member asking.
If you do choose to co-sign, here is what to do:
- Limit the loan you are co-signing on to an amount you can fully pay off yourself if your relative is unable to pay it.
- Ask that the payment requests be sent directly to you and request that your relative pays you. Then forward the money to the lender. That way, you will always be aware of payment due dates, and you can ensure for yourself that no payment is ever late.
- Keep careful records of all payments received from your relative and paid to the lender. This will protect you if your relative disagrees with how much he or she owes. It will also help protect you if your credit report is hit with a late payment notice in error.
There's nothing wrong with co-signing a loan, but make sure that you are aware of the risks and that you protect yourself as much as possible. Remember that money issues are one of the most common ways families can be torn apart.
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A female relative co-signed for me when I was very young with no established credit. I was fresh out of the Army and just starting a new job. I made every payment of the 3-year loan on time for two years. I was then asked if I could go ahead and pay off the loan. I did so without hesitation.
Many years later the same relative asked me to co-sign for a car loan. I reluctantly had to refuse, and felt awful doing so, but it was necessary. My family member was retired on a very limited income. Her current car was only 4 years old and still in good shape. She had gone through most of the money she and her husband had saved over the years, and had an on-going pattern of gambling and credit card debts, which I and other family members had already helped cover a number of times.
My refusal to co-sign created friction for awhile, but things did get back to normal. I explained why I wouldn't co-sign and expressed my regret at not being able to do so. The car she had lasted another 6 years, and my credit stayed intact. Sometimes you have to say "No" for the good of all concerned. If you co-sign for another person you had better be willing to kiss the money goodbye.
I cannot think of one good reason to ever cosign on a loan. Not one. There is a reason a business won't accept someone's business without a cosigner. And that is because of the serious risk of default. So why should you? You get paid nothing, yet assume all the risk.
That being said, I know people will still cosign, especially for close friends or family. Firstly, they have to have some skin in the game. That means cash down. At least 15-20%. That tells you the person at least has some financial disipline and secondly reduces your risk if they default. They pay you directly and then you pay the loan payment as the article said, but you pay the loan with your check, not theirs. You have your agreement in writing. And you get paid a fee for cosigning of 10-20% of the amount of the loan prorated over each payment they make to you. This tells the person that there is a real cost to them for imposing on you with this risky venture. There is an escelating late payment fee starting at 10% of the monthly payment for being more than two days late in your actual receipt of a payment. In addition to a bounced check fee of $50 if necessitated. And finally any tangible asset purchased with the loan proceeds is pre-identified to you and secured by you as collatoral and subject to your repossession should they fall behind more than one payment and they agree to not sell or give away the asset without your written permission until the loan is fully paid off including all penalties. No exceptions.
Are these terms strict? You bet. If they object, just tell them too bad. Those are the terms. Take them or leave them. Or take their business elsewhere.
Anyone that co-signs a load deserves what’s likely to come their way.
Why? Because most people that need a co-signer to get a loan are very high risk borrowers as evident by the lender’s co-signer requirement.
Exercise your common sense and run away from such people.
The answer is no. Never do it. No..not ever... you will be sorry in the end. Even for your kids....Even for school loans. Don't ever do it. They will come after you when the good for nothing loser defaults.
If they can't get the loan themselves, then they don't deserve. Across the board. No exceptions.
I had to learn the hard way co-signing an equity loan with an ex-spouse. I ended up being summoned to court on a judgment default.
I will never, ever co-sign again, no matter how dire the borrower's situation is. I'll simply repeat over and over that I'm not in the position to be able to do so. I'd just as soon offer and possibly lose some cash rather than involve a financial third party end up putting an negative mark on my credit report.
If someone needs a cosigner is for a reason , bad credit report ? if so , that's a red flag !! that person is not very good on making payments ! be careful , it also may need a cosigner because of the sum of the loan , may not be making enough money to pay it off , and need to have another source of income , that's where the cosigner kicks in !!! red flag as well !!!!! be careful !!!!! money turn families apart !!! a good responsible person will start his/her credit little by little , with small loans with no co-signer required , then eventually will be ok to get bigger loans without co-signer .
For those of you insisting there is never a good reason to cosign on a loan, I would have never been able to go to the college I desired to receive my degree had it not been for a couple of loving uncles and a friend who stepped forward to assist me when my scholarships and federal loans were not enough and my mother could not afford to help me.
I would never ask for someone to cosign on a credit card or personal loan for me, nor would I expect anyone to agree to. I realize there are MANY situations where cosigning is a bad idea, but I shudder to think where I would be today without this support from my family and friends.
It's not quite as simple as saying "Why does this person need a loan? Surely it's a bad investment because they can't handle money." Having personally been turned down for an auto loan with a credit score approaching 800 on all 3 reports, around $3000 AFTER tax monthly income, and only about $500/month in bills to pay, 0 credit card debt since I pay in full monthly. The reason I was turned down for a loan? I'd never had a loan. I couldn't get a loan because I didn't have a loan. I didn't have a loan because I couldn't get a loan. Couldn't get a co-signer because everyone capable of signing for me had horrible credit and it wouldn't go through anyway, so I asked my father to co-sign. He said nope.
Alright, swallow my pride, bite the bullet, and start saving. Went back with $12,000 cash as down payment. Guess what? Turned down for a loan on a $30k car because I don't have a history of debt/loans. Go figure! Seems the only way I can get a car is to drive something I don't want, get a co-signer, or save for quite a while longer and just pay cash, which puts me right back in the same spot I'm already in-- unable to get a loan in the future because I've never had a loan. Granted, my situation is pretty unique, but sometimes co-signing is the only option for a responsible person.
That being said, unless I knew without a doubt that the relative/friend was capable of paying the loan completely, I wouldn't even consider it. I suppose I'm something of a hypocrite in that sense.
I agree with zdrick that there is no one good reason why someone should co-sign a loan. But when reality strikes, there may be a real need to do this noble act, depending on the situation. The amount of the loan is also an important consideration. There are actually pro-active ways to protect one's self if and when co-signing a loan is the only option. Once the loan has been approved, it is also smart that you exercise vigilance over the payment responsibility of either your friend or relative. As you have given your trust and your signature, you can very well ask the lender and the borrower to oblige you with some safety precautions like notifying you for any late payment. It's additional stress, but there could be ways this won't happen if you are informed beforehand. There are more ways I got from this related article http://financesonline.com/loan-co-signor-how-to-protect-yourself-from-the-risks/.
Be not one of those who give pledges, who put up security for debts. If you have nothing with which to pay, why should your bed be taken from under you?
Ok people that think a co signer is a bad thing... I have had one car loan and lots of other sources for credit refrences and I still can not get a loan, or credit cards with out a co signer. I payed my car loan off early and made every payment on time or early. they say I have insufficent credit history because I never have had a credit card. I am 33 years old and they look at me like im a leper because I have never had a credit card. I go and TRY to get a loan sorry not enought credit history but I do see you have had credit in the past but well not enought history... I have no way to get a loan without a co-signer. I have pulled my hair out trying to figure out how to get credit but I cant even get a wal-mart card again for lot enough credit history. so I have just plain given up and said scrw it and I will continue to pay for everything with cash and or my debt card. If and when the time comes Ill just have to rob a bank or knock off a liquor store to get the down payment for a house or a car.
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