Okay, your 20-year-old son just asked you to co-sign for his new truck. Without your signature the loan will be denied, he will be forced to take the bus to work, he will more than likely loose his job, and he will be forced to move back in with you thereby ruining any chance of your early retirement. Rats!
Perhaps, your 19-year-old daughter in college has asked you to cosign on her student loan. Without the student loan she will not be able to complete college and get her degree in medicine. She will have to resign herself to waiting tables and serving hot wings while wearing bright orange short shorts! Yikes!
Maybe, your best friend from work just asked you to cosign with him on a loan to purchase a “lunch truck”. “It’s guaranteed to bring in thousands of dollars a month”, he tells you. “You’ll get a percentage of the take. It’s a no brainer!” Umm……….well……….
So then, what do you do? Before you sign off on someone else’s loan you must consider several factors. Your relationship with the person and the person’s history are very important when considering co-signing on any loan.
First of all, there seems to be a misconception of your liability as a co-signer. Contrary to popular belief, you are not only half responsible for the debt. Many people have told me that since the debt is $10,000.00 they, as a co-signer, are only responsible for $5,000.00 if the other party defaults on the loan. NO! Understand that you are 100% responsible for the debt. If the other party defaults on the loan and skips town, you will be responsible for the entire amount. This will include harassing phone calls, lawsuits and garnishments of your income.
If your friend at work has a history of “get rich quick schemes” that seem to continually fall apart or if he always appears to be have financial problems, then regardless of how promising his current idea may be, you may not want to put yourself in jeopardy by co-signing on his loan.
If your flaky 20 year old son, that cannot seem to hold down a job, asks you to co-sign on his new truck, regardless of the sob story, regardless of the fact that he is your own progeny, you may want to really think about it before you put pen to paper and ruin your perfect credit score.
To add to the problem of judging the persons character before you sign, you must consider that even the most responsible person can hit hard times. Your nephew, that has held a steady job for over 10 years, could find himself unemployed. Your daughter in college, could graduate, but not be able to find a job to payback her debts.
Even if the bill is paid, but the payment is late on occasion, this will affect your credit score. You heard right! Make no mistake, this debt is yours and is reported on your credit report. If several late payments are made, your owns credit cards may increase your interest rates! Your overall score could be lowered, thus preventing you from financing your own vehicle or house. Even if they pay it on time, your debt ratio is affected. Adding more debt to your credit report, even if it was for someone else, can affect your score.
If you are being asked to cosign on a debt, consider the fact that there must be a reason. Perhaps the other party has terrible credit or does not have the income to support the debt. These would be huge red flags why NOT to co-sign on the debt.
Another issue with cosigning a debt is the issue of the potential damage it could do to your relationship. If the other party does default, regardless of whether or not it was their fault, it would put your relationship at risk. Even when it comes to your own children. But then, I guess, what would happen to the relationship if you didn’t sign. Something to consider I guess.
The concept of cosigning is such a bad idea that the president of consumer education for SmartCredit.com, John Ulzheimer, has stated that financially “co-signing is probably the worst thing you can do.”
If, after careful consideration, you do decide to co-sign, make sure that you monitor the account. Make sure it is being paid. Make sure that the account is current and being taken care of. The worst thing that can happen is that you are notified by the lender, only when it is too late, that the account is seriously past due and they demand payment in full immediately.
So, consider everything carefully before you sign. That debt is yours and will affect you more than know.
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