Risks of Co-signing Loans
Find out more about the risks associated with co-signing a loan.
Most people co-sign for others when they’re in a bind. When they need a loan for an apartment, for example, but their credit score isn’t that great. Though it may be an easy thing to say, one can’t improve their credit score overnight. After all, credit scores take time to build up. In the case of housing or personal transportation (to those who apply for a car loan), there’s never enough time.
Most co-signers come from family, and it’s easy to see why a parent may want to help out their loved one with the risks attached.
But then you realise that your credit score has taken a dive. Looking further, you find that people who had promised to pay you have been late or have not paid at all. This may be family but they’re dragging your credit score down and even getting collectors calling you.
First thing’s first, figure out how you co-signed the loan. Depending on the type of lender, they may have different requirements for release from liability.
Look into refinancing
Co-signing for someone’s loan or credit card makes you just as responsible for the payments. Your credit score will take a hit if they miss payments, and debt collectors have every right to come after you because of what you owe.
If your co-signer is able to refinance their debts onto a new loan or account that’s only in their name, this can help. You will no longer be responsible for any debts before the original one has been repaid.
It may be unlikely they’ll be able to secure approval on their own but this is the ideal path out from under a bad co-signer situation.
Repay the loan directly
When you have co-signed on a loan, the best solution for both of you is the one you’re not going to be that excited about. If your co-signer isn’t holding up their end, it’s best to take full responsibility for the loan and start paying.
It is not “fair” and will affect your relationship with the borrower. One thing to keep in mind, your agreement with the borrower does not matter to the lender. By putting the agreement in writing, you may be able to eventually seek compensation directly from the borrower. But in the meantime, you’re already on a contract with the lender. By co-signing on their loan, you’re saying “if they can’t pay me back properly, I will.”
If you can work with the borrower to create a repayment plan, do so. But if not, your priority should be protecting your finances and getting the loan in good standing ASAP.
Work with your lender
If you can’t afford the payments for a co-signed loan, there may be options that will work better for your situation. Contact your lender. It’s hard to tell what they can do for you, but perhaps they can put together a payment plan that keeps the account in good standing. Again, a lender isn’t required to do this, but it’s still worth contacting them.
Tips to keep in mind when co-signing
When co-signing, it’s important to keep in mind that lenders, creditors, and leasing agents don’t care about whatever agreement you have with a borrower beforehand.
If a borrower to your loan doesn’t fulfill their obligations, you can’t cancel your responsibility or end the contract prematurely. You’ll have to wait until the loan is fulfilled and completed.
Ownership and liability are two separate things. If you co-signed on a car loan for somebody, but aren’t on the title, you’re accountable for making their car payments but have no claim to the vehicle itself.
A credit co-signing can be costly, but having someone with good credit act as the co-signer helps to allay these worries. Not only does it help to build your credibility along the way, but you also cut down on the risks of a bad co-signing.
Co-signing loans can be detrimental to your personal finances. Make sure you do your research before offering to co-sign for a friend or family member because in some cases, the advantages outweigh the disadvantages. It’s important to remember that if things go south, it may be long, hard road to recovery.
Join savings group in lieu of co-signing
Instead of co-signing, consider joining a savings group with them. You can help them build a good savings habit and give them the advantage of affordable payouts to pay down their debts. Co-savings group gives them a powerful tool to manage their debts and works better in the long run. Learn more about how to get started here.