Thinking about co-signing your son or daughters student loan?  Have a family member in need of money and they want you to be a co-signer? How about a friend who has fallen on hard times and could use your good credit to help get them back on their feet?

Should you co-sign a loan?

 
The first thing to consider is why they were not able to get approved for the loan on their own. Perhaps insufficient income to afford the loan payments or they do not have a sufficient credit history. Could it be that they have a history of late or missing payments?

When you add your signature to loan documentation, you are taking a risk that the lender is not willing to take. 

 

Here are three things you need to know before you co-sign and become legally obligated to repay the loan if the borrower doesn’t:  

 

1)  The loan will appear on your credit report and it will impact your ability to borrow in the future. This debt impacts your utilization ratio and debt burden, so when you apply to borrow down the road lenders will think the co-signed debt is your debt. 

2)  This loan could negatively affect your credit score.  If the primary borrower misses a single payment that is 30 days or more delinquent your credit score could take a hit of 90 to 110. Remember, this will stay on your credit report for seven years. 

3)  The lender could collect from you before collecting from the primary borrower. While this may not seem fair, it is actually legal in many states. If the bank believes you can pay but the borrower can’t – you bet they are coming for it and you.

 

If you are now ready to sign on that dotted line I have one rule of thumb…  

 

Be sure the borrower agrees to set up email and/or text alerts letting you know when payments are due, late, and a payment is posted. If the person you’re going to cosign has a problem with that, it may be a sign that he or she thinks there will be trouble ahead.

Are you thinking about co-signing a loan and have questions, give me a call or send me an email.

 

Until next month,
 
Erik Kaplan
THD Credit Consulting
(800) 822-7120
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