Co-Signing for Another: A Wise Decision? Understanding the Financial and Emotional Risks
Here’s a common scenario:
Let's imagine you've been dating your significant other for a few months, and she brings up the conversation topic of her junker car, or perhaps she has no car at all. She says she'd like to buy a new vehicle for safety reasons or to commute to work. You accompany her to the local car dealership to explore vehicle options. After she selects a car, the salesman returns to say, "I'm sorry, but your credit doesn't qualify you for an auto loan." She is devastated and begins to cry. The salesman suggests, “Maybe you could go on the loan with her?"
Some other common Co-Signing Scenarios:
- Child Needing Student Loan: Should your student choose to drop out of school, the debt still exists!
- Friend Seeking Medical Loan: If the friend is dissatisfied with the outcome of their medical procedure, the bill will still be due.
- Sibling Struggling With A Rental Lease: If the family member needs to relocate For Example: job or school changes, loses their job, or perhaps feels the neighborhood is no longer safe and relocation is necessary, there is still an obligation to fulfill the lease term.
Strained Relationships
Co-signing for a family member, friend, or significant other is a decision that carries significant emotional and financial implications. While it may begin as a generous gesture it is vital to weigh possible consequences before committing to such an agreement. Money matters can be a major source of tension. If the borrower fails to meet their obligations it could lead to arguments and resentment between you and your loved one.
Understanding the Risks of Co-Signing
- You may find yourself responsible for damages should a co-signed vehicle become involved in an accident when there’s not enough (or any) insurance on the policy to cover damages. If the accident is the borrower’s fault, you may be liable for damages to both vehicles.
- As a co-signer, you may be liable for medical costs for injuries and damages exceeding an insurance company's coverage limit. As a registered co-owner, you may be named in a civil suit should an injured party pursue a further claim in court.
- If you signed as a co-signer rather than a co-buyer know that a co-signer has no legal rights to the property. You remain liable for all payments, interest, court costs, and damages if the borrower fails to pay. Your name would be on the contract but not the title. You would have no right to take possession of the vehicle even if you are the only one making the payments to maintain your good credit. A co-buyer may have virtually the same rights to the property depending on local law where the property is located. If you don’t know local laws on ownership and possession of the vehicle, it is advisable to seek legal advice before taking action. This doesn’t suggest that being a co-buyer is a good idea in these scenarios but this might be the deal breaker for many people who didn’t know!
Alternatives to Co-Signing
Let's say you realize co-signing is not a good idea, how might you still offer support?
- Speedy Credit Repair offers a 100% free credit review and complimentary consultation with a professional credit repair expert. After completing a comprehensive narrative and visual review of the credit profile and credit scores, Speedy Credit Repair will discuss available options.
- Speedy Credit Repair offers free access to a content-rich Education section available here for self-help methods, or possibly use of Speedy Credit Repair's paid-for services to resolve credit issues. They may suggest you seek out local credit counseling organizations.
- Explore co-signer alternatives like a secured loan requiring collateral. While this type of loan is not ideal due to the expense of collateral loans, it is occasionally the only alternative for persons unable to secure a conventional loan alone. Auto loans are not typically done like this but a significant downpayment for an auto might be obtained this way. If you do go this route, be sure to calculate the payment of both the collateral loan and the item you seek the loan for to be sure it is within your means to repay.
- Openly discuss the possibility of finding a co-signer with established credit who isn't emotionally close to them, potentially minimizing relationship strain if things go wrong.
Protecting Yourself If You Do Co-Sign
Did you choose to be financially obligated by co-signing a loan? Setting clear boundaries and expectations upfront is crucial. Here's how to add some optional protection:
- Open and Honest Communication: Discuss the borrower's job stability, income, overall financial health, and budget (including insurance and fuel costs) openly and honestly.
- Mutually Agreed Repayment Plan: Establish a clear repayment plan both parties agree to and document in writing. This plan should include a process for communicating any foreseen or unforeseen changes.
- A written Co-Signer Agreement (Optional): For added security, consider drafting a written agreement highlighting each party's obligations and consequences of non-fulfillment.
- Speedy Credit Repair Recommends Direct Loan Payments (Optional, but strongly recommended by Speedy Credit Repair): If it is uncomfortable to relinquish control, arrange for all loan payments to be made directly to you. This minimizes the risk of missed payments impacting your credit score. To prepare for such situations, we additionally suggest collecting at least one month's payment in advance for funding, ensuring you're equipped to address any unexpected lapses. Regardless of the circumstances—a late or absent payment due to a bank error, delayed payroll deposit, or simple forgetfulness, and if the borrower fails to inform you (often out of shame), you'll have the opportunity to intervene and prevent harm to your credit.
Why These Steps Matter
By following these steps, you can co-sign a loan with greater confidence, knowing you've taken measures to protect your financial well-being. It is recommended you verify the insurance policy never lapses. Additionally, if you are a co-buyer, include in your written agreement that you are being provided with a complete set of keys to the vehicle in case you need to access it in the event of a breach of your contract. (A co-signer has no legal right to the property) A missed payment on any co-signed loan or lease will negatively affect your credit and scores for years resulting in your inability to secure loans or mortgages for yourself.
Beyond Just Saying No
If you are emotionally involved with the person requesting you to co-sign for them, simply saying “no” without offering alternatives could be seen as a lack of compassion. It is possible to assist someone you care about without becoming a co-signer. Perhaps suggest improving their credit score with assistance from credit counseling services offered by Speedy Credit Repair Inc. or one of many credit counseling options. There may be other options for a loan or a co-signer who is not emotionally close. Consider the impact on relationships and emotional distress if things go awry.
Don't Co-Sign Without Knowing Your Options!
Co-signing can be a generous gesture, but it's a decision that shouldn't be taken lightly.
Contact Speedy Credit Repair Inc. today or sign up for a free consultation to discuss your specific situation and explore ways to improve your credit score, or the borrower's credit score, potentially eliminating the need for a co-signer.
