Don’t Trip Over Co-Signing

Updated: Apr 23, 2020

One way to get this point across might be to give you 10 reasons not to co-sign for someone (heck there may even be a few more than that), however I opt to take the proverbial high road and spin the most yawn-deserving of topics and position them in a way that can provide both safety and freedom. Since we are humans, and since humans are capable of experiencing complex emotions such as compassion, empathy, and altruism, my objective is not to tell you not to help a friend in need but rather to inspire a little proper planning. To accomplish this, let’s compare the co-signing of a loan with exercising.

Pre-workout warm-up. Ask anyone what the most important exercise is and the answer you will hear more often than not is the pre-workout warm-up. When it comes to co-signing a loan, know what you are about to get into. There are plenty of variables to consider such as being 100% liable for the payments if the primary borrower doesn’t honour the loan, potential lawsuits, tax consequences, and especially tarnished relationships. If you “warm-up” prior to signing on the dotted line you will know precisely what you are about to involve yourself with and thus can develop a contingency plan. Consider what type of loan you are co-signing for. If it is a credit card for example which is one of the easiest loans to obtain the person asking for the co-sign must have very little, to no credit. Payday loans are another story because if someone requires a payday loan they likely are already behind in other payments; what’s the expression? “Robbing from Peter to pay Paul.” The more common co-sign requests are for mortgages or vehicles, one of the key points to consider is the sheer size of these liabilities and how costly the monthly payments could be. Remember, since you co-signed, if the borrower doesn’t pay you are responsible for the entire loan, you cannot just pay half and expect the rest to be taken care of by the original borrower.

Have the proper form. Generally speaking, when someone asks you to co-sign a loan it’s because you have good credit and or strong income. The concept goes beyond your good credit score. Remember that even though you will not own the item being purchased it will appear on your credit report. If payments are missed it will negatively impact your score. As important, is to know if you yourself, will be applying for any credit in the near future. If you need to make amendments to your mortgage and you’ve co-signed a Maserati for your Bieber-esque nephew, that large payment will count against your ability to qualify for your own credit needs. Know what’s on your financial horizon before minimizing your ability to access lending in future.

Keep track of your progress. It is your right to gather as much information as needed to make the best decision. This doesn’t have to just be prior to obtaining the loan. In fact, a good strategy might be to ask for regular payment details and confirm each payment has been made on it’s scheduled due date. Taking this extra precaution to track payments and the total number of payments needed to repay the loan can save you from sleepless nights or unexpected surprises. Since you are providing a substantial service to a friend or family member these details aren’t something you should be afraid to ask for.

There you have it friends, despite the little upside and the potential of pulling a financial muscle, you can still co-sign a loan but know how it impacts you and plan accordingly.