Guest Post: Should You Co-Sign That Loan?
Guest post by Linda Bustos, an editor at Creditorweb, for Yielding Wealth.
Co-signing a loan is a serious financial commitment, and carries risks with serious consequences. Often times loans are co-signed for children, relatives, friends, business partners or romantic partners but this is not always a wise decision.
The Bad
When you co-sign a loan, you enter a legally binding agreement that holds you responsible for the entire debt if the borrower is unable to pay his or herself. This will appear on your credit record and could affect your ability to take loans for yourself in the future (credit lenders may conclude you have too much credit available making you a credit risk).
The Ugly
Banks will not chase the one who is less likely to pay, they will chase after you – as of course there’s a much better chance of getting money out of you than the one who can’t pay the bills. And if you’re unable to pay, you could face telephone harassment and legal action, and wind up owing the full debt plus interest.
It gets worse.
Some people have had wages garnished or been forced to sell their homes to repay the debt, their legal fees and even the bank’s legal fees.
If you do find yourself in this unfortunate situation, you can negotiate a little. Banks would rather collect something than nothing. If you demonstrate you are willing to pay what you can – 60% or 70% of the amount owing – your credit lender might meet you half-way.
It’s wise to negotiate for a clean credit record along with the reduced settlement.
What About College Students? – The Good
There are some situations where a co-sign arrangement can be a good thing.
Proud papas and mamas often want to give their children a helping hand during college. Credit cards, if used responsibly can help establish a good credit history – but we also may be giving our young adults too much “credit” than is due in the responsibility department. So you’ll want to make sure that if you co-sign for a credit card or credit line, you keep the limit reasonable, and within what you’d be able to pay for should things get out of control.
Another option is to take out a credit card yourself and have your child co-sign. A co-signer does not receive notification when payments are missed until 2 or more payments are missed. One missed payment can hurt your credit score. So making your child the co-signer, he or she can build a credit rating and have the freedom and convenience of a credit card, but you’ll receive all the statements in the mail yourself. You could also set up online banking and share access if you live in different states.
Alternatively, you could use pre-paid credit cards until your child demonstrates he or she can handle money independently.
Creditorweb is a place to learn about responsible credit card use and compare credit card offers.
Image credit: sxc.hu
Tags: build credit rating, co-sign loan, credit-cards, Creditorweb, Linda Bustos, pre-paid credit cards, yielding wealthRelated Stories
POSTED IN: Credit, Family finances, Money advice, Personal Finance
1 opinion for Guest Post: Should You Co-Sign That Loan?
Jennifer Heigl
Mar 27, 2008 at 12:44 pm
I’m still amazed at how many people enter into a co-signing arrangement without thinking about the long-term effects. If someone is having difficulty acquiring a loan, they’ll probably have difficulty paying for it as well! Duh!
Great article Linda! I’m passing it along to all of my unsuspecting family and friends. ;) Thank you!
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