Things You Should Know Before Co-Signing on a Loan

If you’re anything like me, you love your kids and grandkids with all your heart and would do
practically anything for them. But when it comes to co-signing on a loan, you need to look before you leap. Otherwise you could end up in a heap of financial trouble if your loved one defaults on the loan. Since it’s especially important to protect your financial assets as a senior, here are a few things you should know before you ever co-sign on a loan.

Many Co-Signers Get Stuck With Unwanted Debt

Statistics are pretty powerful, especially when used as warnings to avoid unpleasant situations. So before you co-sign on a loan, pay attention to this statistic: More than 30% of people who co-sign on loans end up stuck with unwanted debt. This is according to multiple surveys.

The most common reason a co-signer gets saddled with debt is because the other co-signer
defaults on the loan. That’s right, if Suzy loses her job and can no longer afford those car
payments, you’re going to be stuck footing the bill.

Another situation to consider is if the other party on the loan dies. You never want to think of that happening, but the truth is that death can knock at anyone’s door at any time. If the loan goes into default because the other co-signer is no longer around to pay it, you will probably be sued by the lender.

You Are Responsible for Repaying the Loan

As unfair as it may seem, if your child or grandchild fails to pay the loan, you are ultimately
responsible to pay it as a co-signer. The minute you sign your name on that line, you’re agreeing to take full responsibility over the loan if the primary signer won’t or can’t pay it. I don’t know about you, but that kind of commitment makes me rather uncomfortable, since it’s impossible to know what the future may hold.

Co-Signers Can Receive Monthly Statements

If you want to avoid being called unexpectedly by creditors because your child or grandchild
hasn’t been making payments, you can ask to receive monthly statements. It’s important to ask the lender for these statements, because sometimes they will only send them to the primary borrower unless they receive a request from the co-signer.

Once you start receiving monthly statements, you’ll be alerted of any missed payments. Then you can get after little Johnny or Sally to make their payments before the loan goes into default. If the loan on a vehicle goes into default, the lender may attempt to repossess the vehicle. So, it’s in Johnny or Sally’s interest to make their payments on time anyway. If they’re ever late making payments, remind them of this fact and see how they respond.

Co-Signing Could Affect Your Credit

When you co-sign on a loan, the debt shows up in your credit profile as well as the primary
borrower’s credit profile. That means your credit score could be negatively affected. Your debt-to-income ratio should remain below a certain amount in order to maintain a good credit score. If you co-sign on a loan and it makes your debt-to-income ratio too high, it could affect your borrowing ability. Additionally, if there are any missed or late payments on the loan that you co- signed on, they will show up under your credit profile as well.

Think Carefully Before Committing

Now that you know some of the major risks you take when co-signing on a loan, you can make a responsible decision that’s right for your situation. I’m not saying you should never help a child or grandchild out, but be extra cautious about co-signing because you’re essentially putting your own financial future at risk when you do so.

David Madrid - September 27, 2020

I did learn the hard way, I’ve been asked a few times but I kind of make excuses.

Wahu - September 27, 2020

I wish I had read your blog before co-signing a loan.

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