Since we are all adults I can be honest. At one point or another in your adult life, you may be faced with a co-sign request (if you haven’t already been asked). You may be tempted to offer your help-depending on the individual- but not so fast.
Co-signing is a major financial decision and you should consider all of the potential outcomes before settling on a final decision. Here is what you should consider before you decide to co-sign.
What Does It Mean To Co-Sign?
There is a lot of confusing information floating around regarding co-signing. A co-signer or joint applicant is someone that is responsible for a share of the account liability.
For example: Your sister is interested in buying a new car, but she has poor credit history and cannot get approved for a car on her own merit. Conversely your credit score is excellent. Your sister could call you and request that you co-sign or guarantee that she will make the payments. She essentially borrows your credit history to be approved for her purchase. Although the co-signed item is for your sister and she makes the payments, you are also responsible for the debt. The item will reflect on your credit report and if your sister is late on the payments or if the car is repossessed, the negative actions will be reflected on your credit report and will decrease your credit score. If your sister maintains a perfect payment history, this will reflect positively on your credit score. In order to have the item removed from your credit report and out of your name, your sister would need to refinance the car in her name once her credit standing has improved.
The idea behind co-signing is that the person with the good credit will not want their credit impacted so they will make payments if the primary payee stops. But does it always work like that? No.
When Co-Signing Is A Good Idea?
This is probably one of the most frequently asked questions and the most difficult to answer. There is no crystal ball to tell us if a person is going to be late or miss a payment.
Ideally you should only co-sign only when you have some control over the finances and can ensure that payments are made in a timely manner. For example, you co-sign for your child because you have access to their checking account and can automatically transfer the money into your account every pay period to ensure an on time payment. Another ideal situation is if you are married and manage all of the finances for the household and you know that your spouse will pay. It is vital to remember that when you co-sign for your spouse, you are responsible for joint debt regardless of the marriage status. Even if you divorce, you are responsible for debts entered jointly during the marriage.
Co-signing can actually be used to build credit.
When Is Co-Signing Just a Flat Out Bad Idea?
- Anytime you have to hope, wish, or pray a person makes the payment on time.
- If the person requesting the co-sign is financially unstable.
- If you are being coerced into co-signing.
- If you do not have the money to pay the debt if the primary payer stops making payments.
If you value the relationship tread lightly. Disputes involving co-signs can have long-term consequences and can ruin your relationship. I have seen bad scenarios involving parent and child, spouses, friends, family members, and even random people co-signing for people they don’t know that well! When the paying party is late on payments or worse, the item goes into default. You are equally responsible for making the payments whether you use the property or not. If the matter goes to court you are also eligible to be sued in a civil suit.
The Bottom Line
There are options for persons who are told they need a co-signer, such as increasing their down payment, accepting a higher interest rate, or waiting until they improve their credit so that they can apply on their own.
It is important to remember that you do not need a reason to tell someone “no”. You worked hard to build and maintain your credit standing, the last thing you want is someone jeopardizing all of your hard work.