Considering becoming a co-signer? Know the potential risks!
When a friend or relative comes to you in a financial pinch, hoping that you can help them acquire a loan by being a co-signer, it’s natural to want to help them. When done responsibly, it’s a great way to help them get back on their feet or establish their own credit history. Unfortunately, being a co-signer can also come with a lot of risks that could negatively affect your own credit report.
What does being a co-signer really mean? When co-signing for someone, you are agreeing to be equally responsible for repaying the loan in the event that the primary borrower is unable to do so. This can obviously be seen as a huge risk, and there are other risks to take into consideration as well before deciding whether or not to be a co-signer.
1. Financial responsibility – As a co-signer on a loan, you are equally responsible for repaying the loan or debt. If the primary borrower fails to make payments, the lender is able to come after you for the full amount. If the creditor decides to take legal action, you could be subject to lawsuits, wage garnishment, or other legal consequences as well. In the case of insolvency, if the primary borrower files for Bankruptcy or files a Consumer Proposal, the co-signer is still on the hook for the loan.
2. Impact on your credit – The shared loan will appear on your credit report. If by chance the primary borrower has late or missed payments on the shared loan or line or credit, it can negatively impact your credit score. Your credit report could show a variety of things if the primary borrower is unable to make the payments, and you are unable to make the payments on their behalf. Late payments, asset repossession, and if the account gets sent to collections can all show on your report and have negative effects on your credit score.
3. Limiting your borrowing power – Being a co-signer on a loan can affect your ability to acquire credit for yourself. Even if the loan you co-signed is in good standings, it could affect your debt-to-income ratio which could lead lenders to deny any applications of your own. Being a co-signer can also make you a riskier borrower to creditors because your ability to make payments also highly depends on the primary borrower’s ability to make payments on the loan you have co-signed.
4. Difficulty removing the co-signer status – If you have a fall out with the primary borrower or have fallen on difficult times yourself and need access to a loan, your first thought might be to get your name removed from the loan you co-signed on. However, that might not be a possibility depending on the primary borrower’s financial situation. If their situation has not improved and they cannot qualify for the loan on their own, the financial institution may refuse to release you from the obligation.
5. Strained relationships – Bringing money into a relationship can have negative effects, especially if you are a co-signer on a loan and the primary borrower is unable to make their payments. This can leave you in a tough spot and left to deal with their debts.
When deciding whether to be a co-signer for a friend or relative, it’s important to take the above risks into consideration. It’s important to consider the primary borrowers own financial history when deciding whether to co-sign or not. Do they have a reliable job? Do they have a good payment history on their own financial obligations? Do they take steps to better their financial situation? Are the funds they are trying to acquire necessary? It’s also important to take your financial situation into consideration. Before co-signing a loan, ensure you are in a financial position to make the payments in case the primary borrower is unable to.
If you have co-signed a loan and acquired debt because of the primary borrower being unable to pay, and find yourself unable to make the payments, there are options.
If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options. Every financial situation is unique and viable options can differ from person to person. A conversation free of judgment is the first step to determine options for debt that make sense to you. For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.