09 January 2014
Co-Signing for a Loan: Is it Ever a Good Idea?

When you co-sign for a loan, chances are it’s because the loan applicant’s credit history isn’t great.  It may even be nonexistent, in the case of young people who haven’t had the chance to prove that they are credit-worthy.

Lenders know that the more individuals responsible for the payback of the loan, the lower the lender’s risk. That’s why many lenders require a co-signer for loans made to individuals who have a poor credit history, or no credit history.

When you co-sign for a car loan for a kid off to college, or co-sign a lease so your scholar can live off campus, you assume full responsibility for the timely payment of that loan in the event that the primary loan recipient fails to make payments.

For this reason, some experts say it’s never a good idea to co-sign for a loan*– even if it’s a loan for someone you trust. Example? You co- sign a car loan for your brother. He loses his job and moves out of town, but you’re still responsible for making those car payments if he doesn’t – even if you don’t have the car!

As the co-signer on a loan, you assume responsibility for the payback of that loan. If the primary loan holder doesn’t pay back the loan, and you’re stuck making payments – late payments – it could have a negative impact on your pristine credit history, not to mention the negative hit you take each month paying off someone else’s debt.

Is It Ever a Good Idea to Co-Sign for a Loan?

In most cases, the answer is simple. No. You shouldn’t co-sign for a loan, simply because you have little or no control over whether that loan will be paid off in a timely fashion.

However, there are times when it may be necessary to co-sign for a loan. A child going off to school probably doesn’t have a credit history, so he or she may need you to co-sign for a credit card, an apartment lease, a car, or some other necessary expense.

Can You Get Out from Under?

What can a co-signer do in the case of a loan default by the loan recipient? In many cases, there isn’t much the co-signer can do once the loan agreement is in place. However, some lenders will change terms as the loan recipient’s circumstances change.

Once that collage student graduates and starts earning a salary, some lenders will allow a co-signer to be removed from the loan agreement after a certain number of on-time payments are made. When shopping for a loan on which you’ll be a co-signer, look for terms that may enable you to lift your financial responsibility after a certain period of time.

If you’ve co-signed for a loan that can now be paid without your support, one thing you can do as a co-signer is talk to your local bank representative about refinancing the debt with a new agreement – one in which you don’t have to be a co-signer.

In this case, the original recipient of the loan refinances with a new loan, removing your name as co-signer. For example, if you co-sign for your son’s first credit card, within a few years you may be able to close out that first account now that your son has built up a positive payment history of his own.

Think twice before co-signing for a loan – even a loan for a family member or someone you trust. Life comes at us quickly, and circumstances can change overnight.

There’s not much to gain, and you could lose a lot, but sometimes it’s the only way to get a family member, or other loved one, on the track to a better financial life.

Only you can decide, so decide wisely.

* www.moneytalksnews.com/2013/10/29/ask-stacy-should-i-co-sign-my-college-freshman-sons-lease/

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.

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