The Risks Of Co-signing For Someone With Bad Credit

on May 24, 2018by in Bad Credit Loans

Co-signing for friends/ family, particularly for someone with bad credit, is a serious decision. And one that must be done with great caution – as you can tell by the images I choose for this article!

Many consumers with bad credit ask a friend or a relative for help to get approved for a loan. Friends and relatives are only too glad to be of help and may agree to co-sign without considering the possible consequences.

Although it is an EXTREMELY kind thing to do, financial experts strongly recommend for the co-signer understand what is expected of them should the person they are co-signing for default.

Remember, it is possible to show people how special they are and how much we love them WITHOUT getting ourselves into financial trouble.

Thinking about helping a friend or family member out by co-signing for them? Before you sign that contract, here is what you need to know about co-signing on loans or credit cards.

Always keep the following in mind when someone asks you to co-sign for them.

  1. Why does the person who is asking you to co-sign have bad credit?
  2. Has that person recovered and is now financially stable to pay the loan?
  3. Does this person handle their finances responsibly?
  4. Would this person feel comfortable in contacting you to let you know they can’t make the monthly payment and need you to step in BEFORE they become delinquent?
  5. Do YOU have sufficient income to step in and make payments if they are unable?

Thinking of co-signing on a loan for a friend or family member? Read this article to learn about the risk associated with co-signing for someone. You could be putting your good credit at risk!

Risks Associated with Co-signing

A common problem with co-signing is that if they pay late on the loan you co-sign for,  their late payment will show up on YOUR credit report.  If the borrower falls behind on his/her payments, your personal credit history as the co-signer will also be affected.

Don’t depend on the lender to tell you that the co-signer is late.  Some of them will notify the co-signer when the loan is 30 days late.  But many don’t start sending out letters to the co-signer until several payments have been missed.

The scenario we see a lot is the person pays late several times, but make up the payment later.  So that while it was 30 days late, it’s now current.  The co-signer is never notified.  And don’t know about the late payments until they either pull their credit report and notice a HUGE drop in their credit rating.  Or the borrower becomes more than 90 days delinquent and they start sending out default letters to all parties.

Do you know that by co-signing for someone, you maybe putting your financial health at risk? Read here about the true cost of co-signing, how to decide if you should co-sign and what you can do to protect your credit if you decide to co-sign

The true cost of co-signing

Obviously, there is more at stake in co-signing a loan than just backing-up someone’s credibility. In case of default, keep in mind that you will be accountable to take over the repayment.

Furthermore, when the time comes that you need to apply for your own loan, you may find it difficult to get approved. For instance, my mother co-signed on my cousins home loan.  When my mom went to buy her own home, they felt she didn’t have sufficient income to cover all her debts and a new mortgage.

My cousin had to refinance her loan and get my mom removed from the loan in order for my mom to move forward with her home loan.    My mom was lucky.  She had co-signed for my cousin 4 years prior.  During that time my cousin had worked with our to improve her credit AND she had gotten married.

My cousin’s new credit score and the additional income her husband brought in made the refinance easy.  If my cousin hadn’t fixed her credit, there could have been a problem with the refinance.

Best advice when considering co-signing

The best advice when you consider co-signing is to treat the loan as your own. If you are not sure whether you can take over the payments if your friend/family member cannot, then clearly you are not in the position to co-sign.

Co-signing for someone is very risky! Here are a few things you can do to try to protect your credit when you co-sign for someone.

Co-signer – How to Protect Your Own Credit

Ok, you have decided to go ahead and co-sign.  There are a few things you should do to protect yourself in case there is any trouble.

  1. Communication: Make sure the person you are co-signing for understands that you want to be contacted immediately if they are unable to make payments
  2. Ask them to sign up for e-statements.  Most banks are pushing everyone to go this way so they don’t have to mail out a statement, saves them money.   But it can also help you stay on top of the loan.  You will be able to see when and if payments are being made on time.
  3. Read the fine print. Be sure to review the Terms and Conditions before co-signing the contract. If you have any concern about the lender’s terms, do not hesitate to call them directly and get clarification.
  4. If you are co-signing for a credit card.  You want to make sure your friend/family member doesn’t add anyone new to the account.   Also, keep an eye on the spending limit.  If you see them asking for credit line increases, make sure you are comfortable with it.  Remember if they stop paying, that is now YOUR debt!  Don’t be afraid to call them and say NO!
About Elizabeth Roberts

Liz Roberts is a Sr. Credit Analyst with Horizon Funding Group Inc. She has been in the business credit industry for 23 years focusing on bad credit business owners and start up businesses. Her background is in consumer credit and collections prior to joining the Horizon team as a credit analyst and writer.