It’s not hard to recall heartbreaking stories of drama that unfolds between family or friends who have agreed to co-sign some sort of loan. They complete the co-signing process only to find themselves on the short end of it all.
In most cases, the only reason a lender asks for a co-signer is because the original borrower is not reliable enough to qualify for the type or amount of credit they are requesting in the first place. The criteria for being a reliable signer comes from an individual’s credit history and credit report. Whether it’s a mortgage, an auto loan, an apartment lease, or some other purchase – if someone’s credit history isn’t good enough, they may need a co-signer to proceed.
When an individual with a less than desirable credit history discovers this deficiency, they must ask for help to receive the financing they are seeking. It can be an embarrassing and difficult task to ask a friend or family member to co-sign and assume this additional financial responsibility. And, often times it can leave the other party feeling awkward and uncomfortable, too.
So what should you do if you’re asked to co-sign? Consider it wisely, and start from a position of “no.” Make a policy right now that this is your standard response, and then never vary from it unless you determine the circumstances warrant you to do so. The potential outcomes that can ensue if this policy isn’t followed can be devastating for all concerned.
Here are some reasons to say “no” to co-signing:
1. Family and friends can be some of the best life assets any individual will have. Agreeing to arrangements that could put a wedge between these relationships is something to consider. It’s always wise to ask if losing a great friend or family member over a bitter financial outcome is worth it. Here’s a quick test; if you’re not willing to just give that amount of money to this person as a gift and it would affect your relationship if that money was never paid back to you, the answer is “no”.
2. Often the co-signer is the one who the lender contacts and pressures if there are missing or late payments. Remember, the co-signer is the one who has good credit and who the institution relies on to make payments in the event the primary borrower is unable to. Why would a lender bother contacting the individual who has poor credit? The first time the co-signer gets a collections call, damaging financial and emotional consequences may begin to surface.
3. The co-signer will be liable for the debt if the original borrower doesn’t pay. Often, the co-signer may not have access to the assets they co-signed for. In this case, it becomes a total loss for the co-signer. Ongoing payments, a lump sum, and even collection and attorney fees may be the consequences for the co-signer.
4. Co-signing a loan means that the co-signer now has a new fiduciary obligation. This obligation shows up on the credit report of this individual as well as for the original borrower. This added debt could be a future impediment to the co-signer’s ability to borrow due to higher debt levels. If the primary borrower slips and misses payments, it will negatively affect the co-signer’s credit report too.
5. A co-signer must maintain an open and honest relationship with the original borrower. The co-signer will need to stay on top of payments made to manage both the relationship and personal finances.
What’s the alternative if your policy is to just say “no”?
Here’s a suggestion. Since a person who wants to take out the loan trusts those asked to co-sign, consider paying for the item outright. Especially in the case of children, a spouse, or a close family member. Taking this step may reduce the possible negative consequences for everyone concerned since in this case the co-signer would otherwise be the primary borrower in full control of making payments.
The individual in need of the support will have time to repair damaged credit. At a later date, the debt can be repaid. The individual who pays for the item can offer sound financial planning advice, or point the person in need in the direction of a good financial advisor.
This method requires that the individual who makes the purchase prioritizes love and concern for the other above repayment. If the relationship doesn’t warrant this kind of sacrifice, then it’s arguable that the original remedy is still the best remedy – just say “no.”