Is Co-signing Right for You?

We have heard of someone needing a co-signer to get approved for a loan, but let’s take a look at what it means to be a co-signer.  A co-signer is someone who signs with a primary borrower in order to guarantee payment.   In essence, if the primary borrower fails to pay, the co-signer is agreeing that they will make the payment as originally agreed with the creditor.

Why are co-signers requested?

There are several situations where a co-signer could be beneficial to the primary borrower or the lender.  One of the key areas would be for someone who is still establishing credit.  If you have not built up credit history yet, a creditor may request for a co-signer who has already proven themselves by repaying other debts well.  A co-signer can also be requested when someone has bad credit.  If the primary borrower has had accounts on the credit but hasn’t repaid the debt on time, the creditor may not be willing to loan to them based on that pay history.  In that case, a creditor may be willing to consider a stronger borrower attached to the loan before deciding to approve it.  Another instance can be if the primary borrower doesn’t have enough income to cover all their debts and living expenses.  You may have heard the phrase “the debt to income is high.”  Simply put, that means you have a lot of debt in relation to the amount of income you are bringing in.  There could be other reasons to have a co-signer on a loan, such as, having a better rate or because there is another borrower with a shared interest in the loan.

Things to know before co-signing.

  1. You are 100% responsible for the payment.  This is something that people do not like to accept as a condition of co-signing.  When you co-sign, you are not just helping out the primary borrower, but you are committing to that debt as if it is your own.  It will appear on your credit, and you will be responsible to make sure every payment is made. 
  2. Co-signing can affect your credit both positively and negatively.  Maintaining good pay history on the loan can help you in a positive way by showing a positive report on your credit, and possibly increasing your score.   Likewise, if you sign on the loan and do not keep up with if the primary borrower is paying or not, your credit can be affected negatively for missed payments.  That can hurt your score.  I have seen several situations where someone has signed for family members and did not keep up with the payment.  By the time they found out about it, the car payment was too far behind to catch up or had been repossessed already.  That will report on your credit report, lower your score, and potentially make it more difficult for you to get financing for yourself when you need it.
  3. Co-signing will affect your Debt-to-Income (DTI).  As previously mentioned, you are 100% responsible for the debt that you co-sign for.  Therefore, it will be included in your personal debts and will increase your debt-to-income ratio.  What this means for you is that depending on how much debt you already have in your name, co-signing can make it more difficult for you to get a loan for yourself if it has increased your DTI too much.
  4. Be mindful of the term you are signing for.  Before you make a commitment to be a co-signer it is important to pay attention to how long the loan term is.  If you are signing for a car, that could be a 4+ year commitment.  A mortgage could be even longer, for 15+ years.  During that time period, you could be making things harder for yourself to get financing.  Also, if you signed with a borrower who is not paying, that could be an additional debt you have picked up.

Once you commit to sign on a loan with someone, it is not always easy to get out of that loan.  You cannot just sign paperwork to get off of that loan because you change your mind.   The primary borrower could try to refinance it in just their name at a later time, but that may not be possible if they needed a co-signer to get approved in the first place.  It is important to only sign for loans that you are truly willing to pay and take responsibility for over the period of the full loan.  Co-signing is a big responsibility, and for some, a big risk.  Make sure you have a full understanding prior to your commitment.

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