Implications of Co-Signing

My previous posts enlightened you on your credit report and credit score.  I feel I would do you injustice if I did not speak briefly on the implications of co-signing debt which, yes, affects your credit. It may also affect your ability to make future purchases. 

For this post, I will use a very common example of co-signing on a family member’s car.  This example can easily be switched and used for situations such as co-signing for just about anything – credit cards, loans, cell phones, etc. 

Co-signing sounds pretty harmless, right?  Keep reading… 

Suzie, your favorite cousin, cannot purchase a car on her own (credit score is very low) and the dealer informs her that she needs a co-signer. (Red flag) You decide to help her out and co-sign… what does this really mean?!

When a person needs a co-signer it means that “the powers that may be” believes from reviewing their financial fingerprint they are unreliable.  The lender does not trust that this person will be able to maintain payments and/or has a history of delinquent payments.  They also use an Albert Einstein scientific formula and it says nope, do not lend to this person unless he/she has a co-signer.  Nonetheless, you decide to co-sign for your cousin.  

 Suzie is very happy!

Now that you have co-signed for Suzie’s new car you are on the hook for the payments if Suzie becomes unemployed, disabled, or just simply decide not to pay.  For the next 60 months (or however long the term period) you are responsible for the payments, too.  Good luck. 

Three years pass by and you haven’t seen Suzie lately and you assume she is so busy with work.  Little do you know - she lost her job over a year ago.  She has been avoiding you like the plague.  You on the other hand saved some money and decide to buy a house.  Well you thought you were going to buy a house but you can’t - why? Because your credit score is terrible, it shows delinquent payments, and your debt-to-income ratio is too high.  (That's right, the debts you have co-signed for will show up as a debt for you as well).

I share this common mistake we make example to say think before you freely sign over your financial fingerprint.  You may think you are helping someone, but you are really harming your credit report, credit score, and ability to make future purchases.

In-short:

• Co-signing on any debt will show up on your credit report as your own debt and will affect your credit score

• If you are thinking about making a big purchase which will need financing during the life of the co-signed loan, you may want to think about the implications (debt-to-income ratio, late payments, etc.)

•  If you do decide to co-sign on a debt:

• Make sure you can afford the payment of the loan and support your own financial obligations.  If the primary borrower defaults on the loan it becomes your responsibility.

• If you are asked to pledge a security such as your car or your home, you can lose this asset if the borrower does not pay or if you cannot afford to pay their loan.

• Keep record of all paperwork associated with the loan.

• By law you are to receive a detailed disclosure notice by the lender which should disclose your financial obligation as a co-signer.

Of course there is more information out there.  As always, I encourage you to learn more about the implications of co-signing before you decide to take on someone’s debt. 

For more information, visit the Federal Trade Commission website at http://ftc.gov/bcp/edu/pubs/consumer/credit/cre06.shtm/.

 

Have a blessed week!

Rianka D.