The Basics Why you should never co-sign a loan You may think youâ??re doing a good deed by adding your name to a loan. Donâ??t do it. You could be headed for big financial trouble. By Mary Rowland What could be worse than being head over heels in debt with little hope of climbing out? Try this: Your child (parent, significant other) is head over heels in debt and your name is on the loan. It happens all the time. I remember meeting a 41-year-old photographer who had recently divorced and inherited $21,000 of his ex-wife's debt. A friend who thought he was involved in a great relationship started picking up the tab for his soon-to-be ex-partner. A parent co-signed for a credit card for her college-age daughter and is now stuck with $30,000 in credit-card debt.Check out your options. Record low rates could save you a bundle. For those of you who are toying with helping out a partner, parent, sibling or child, don't do it by co-signing a note. Adding your name to someone else's debt is a very serious financial step. "You should never co-sign a loan," says Lynn Brenner, a personal finance columnist. If the primary borrower gets behind in payments, "the bank will come after the person they have the greatest chance of collecting from. If they thought they had a good chance of collecting from your son, they wouldn't have required a co-signer in the first place." A risk to your credit rating When you co-sign a loan, you are signing a legal contract that holds you responsible for the entire debt, say consumer credit experts. If the borrower does not repay, it can be reported on your credit record. If it goes to a collection agency, the agency will try to collect from you. But the bank can do more than ruin your credit rating. It can sue you and get a judgment against you for the amount of the loan plus interest. "You must go to court and disclose all your assets," Brenner says. "It can even force the sale of your house." And, if the document is like most loan guarantees, it allows the bank to charge you its own legal fees in collecting the debt from you. A typical loan document is written in very small print on two sides of an 8â? x 14â? piece of paper. "Very often people sign it without reading it, particularly when they want to help a child," Brenner says. They assume that the lender will exhaust every means of collecting from the primary borrower before it comes after the co-signer. "But the agreement typically allows the lender to decide who to go after," Brenner says. Collectors go after the person who offers the best chance of recovering the money. If a loan becomes delinquent, a collector can choose to call you, harass you, rather than your friend or relative, if the collector sees that you have a much better repayment record. Even if the loan is repaid on time each month, another lender may consider the amount of debt that you co-signed when determining if you already have too much credit. In other words, if youâ??ve added your good name to someone elseâ??s debt, it could be counted against you if you need a loan. If you get stuck, try to negotiate If you're already on the hook for someone else's debt, you may have to pay it off. Before you do that, you might try negotiating to see if you can get it reduced. That's what my new photographer friend did. He called the credit-card companies and offered to pay 65 cents on the dollar. Itâ??s a little known fact, but you can negotiate with credit companies on how much youâ??ll pay of what is owed. Most credit-card companies will agree to a lower repayment amount rather than face having to wait months or years to get something -- if anything. In this case, the creditor countered with 85%. He ended up paying 75 cents on the dollar to settle the debt. If you do that, be certain that you get a clean credit record as part of the negotiation. Get that in writing and follow up to make certain that your record is unimpaired. You should also negotiate a contract with the primary borrower before you pay off the debt. Teens and credit cards If you want to teach your teenagers about using credit, do it carefully. High school seniors are inundated by credit-card offers, says Gerri Detweiler, author of "The Ultimate Credit Handbook." The average adult already has eight to 10 cards, so high schoolers are one of the few untapped markets. "They're a good risk because parents stand behind the debt," Detweiler says. Card issuers want them because teenagers tend to be loyal to their first card. Establishing credit is an important step for young adults. It will help them rent their first apartment and perhaps help them get a job. But Detweiler says you shouldn't co-sign for a teenager because "you usually don't find out about unpaid bills until it's too late." The lender is not required to notify the co-signer until the primary borrower is in default, she says. R E L A T E D S I T E -------------------------------------------------------------------------------- National Foundation for Consumer Credit Detweiler suggests instead that you go through the mail solicitations with your teenager, pick a card and become the primary borrower yourself with your child as the co-signer. "He still gets the benefit of building the credit rating," she says. "But you get the bills so you know what's going on." She also suggests that you set rules for what can be charged and how the bills will be paid. If your child, parent, friend, is already in trouble, or if you are in trouble along with him or her, check out the National Foundation for Consumer Credit Web site. (See link at left.) It also has a referral service for finding an office near you. Most lenders are happy to work with you when you indicate your willingness to whittle down the debt.
I totally agree with not signing anything for anyone, not even a child. I'm still amazed that people re-finance their homes to pay for their children's weddings. It is a nice thing to do, but financially, I do not think it is wise. Before I get beat up, that is my opinion..... ;-)
Exactly. And the people you have to co-sign for Have ****ed up. So who says they wont **** up again? If you cant get credit on your own, You have no biz getting credit PERIOD. I think it takes a thoughtless ignorant person to even ask for someone to co-sign for them. KNowing if they screw up, the other person WILL be sued, harrased, etc.
What was it that Doc said in his post about certain people that keep harping on one particular issue?
Exactly. Starting to piss me off a little. When I was 19 I needed a new car. Guess what? I couldn't get it without a co-signer and I had not ******up, as you put it lesarin. And guess what again? It all got paid back on time. And your title to this thread shows a lot of class.
I want to clarify that I didn't mean to offend anyone by my reply. I had a bad experience when I co-signed for someone who ended up stiffing me. I know my reply sounds mean, but I didn't mean it that way.
Co signing can be great if you actually know the person. I have a friend who co-signed for another friend, and the friend ended up leaving the state and the debt. They weren't even really friends....just acquaintances. Ho Hum. And, I think that the suckers was a bit harsh. I mean, my husband is probably going to have to co sign for me for a while until I get my credit completely build up, but that doesn't mean he's a sucker. He knows what he's getting into.
Several years ago when I was financially on the ropes, a friend co-signed on an apartment lease for me. It was a GIANT favor, one that helped me out immensely at a time when I needed it, and I will be forever grateful. I hadn't f***ed up; I'd just gone through some terrible financial times, and most of it wasn't caused by me. My friend is hardly a "sucker." You can't reduce everything to a calculation based on credit worthiness and decisons, and then label someone a "sucker" because they have a different set of values than you do. I am fairly successful now, and I know the person who helped me out takes great pride in knowing that, and knowing that his act of kindness, which involved risk as so many of them do, is partly responsible for that success.
Another gotcha on cosigns... The article failed to mention another trap that a close friend fell into. If the borrower declares banruptcy, that BK also goes onto your credit report. My friend's mother was having financial difficulties. The mother refinanced her house to get a lower house payment. However, she could not get the mortgage without a co-signer. She asked her credit-healthy daugher (my friend) to co-sign. Daughter did. Mom got the mortage and that should have been the end of it. Of course the daughter could not afford to take over the note. Never really could in the first place. Three years later the daughter goes to refinance her own home and is declined. There is a BK on her credit report. What?!? It turns out the mother sank into further financial trouble and declared bankruptcy. She did not tell her daughter about it. She filed before ever missing a house payment, so daughter was never contacted by the mortgage company to fullfill her contractual duties. When the house was sold after the BK, the mortgage was paid off. I'm still very confused about the whole mess. The mother refuses to talk about it or give daughter any information. She even denies she ever declared BK, although her son confirmed it for his sister. My friend talked to me about this. I told her to dispute the BK with the CRA, but it came back verified. After digging around, I found that was real and that mom's BK can show up on daughter's credit report because of the co-sign. Now daughter has 10 years of BK info on her report too. That is damn hard to explain to a future loan officer.
Re: Another gotcha on cosigns... As an ex banker, I saw many a cosigner end up in deep trouble. Particularly when a parent cosigned for an automobile for a young kid who was either in school or just had some entry level assembly line job. You look at the cosigners financials and you see they would just barely be able to qualify for a loan of that size. After a time, I always told my cosigners that they need to live there life believeing that this was going to be there responsibility any day. You'd be shocked at how many cosigners just got blindsided. The kid can't make a payment and they are too embarresed to tell Dad the situation and then Dad gets a phone call that junior is 2 months behind and we need it caught up today. No absolutes in life I guess but it would take a heck of a lot to get me to cosign for anyone.
Re: Another gotcha on cosigns... I have to disagree here. There are hundreds of examples of things that could get you in the same trouble. Two examples are authorized users and personal loans. When I bought my first house I got a loan from a friend for 6,000.00. I paid her back every penny, AND sent her and her son on a Disney Cruise for 5 days. I also am an authorized user on 3 of my Dads credit cards and I DO have cards. I could easily (if I was pond scum) go out and spend 10,000 on the cards and know I couldn't pay it back. My point here...co-signing DOES NOT MAKE YOU A SUCKER. Co-signing for a deadbeat does. Co-signing for someone could make a dream come true, help them get to work, or simply make that persons life a hell of a lot easier. I would never suggest co-signing for something that you could not afford to personaly pay a few payments from your own reserves for, as we all know shit happens. Suggesting that people are suckers for doing so however leaves a bad taste in my mouth.
Re: Another gotcha on cosigns... I am sorry, but I disagree with the thread. It depends on the person. When I was 17 my father cosigned for me so I was able to purchase a new truck. He did the same thing with my sisters. He gave each of us a chance and I thank him for that. I never missed a payment because I knew the risk he took by cosigning for me (not to mention he threatened to make my life a living hell if I did not make the payments on time). Plus, how is cosigning any different than being an AU on someone's account? Both entail serious reprecussions if the AU or co-signer does not make the payments. We could also look at joint accounts the same way. It depends on the circumstances and the person(s) involved. There is no set rule or standard that eveyone follows. And I really hate the word suckers. It implies that that person is a fool, which is disrespectful at best. Dani
Re: Another gotcha on cosigns... On a board of this kind I am very suprised to see a thread labeled in this manner. Most of the people here has experienced financial hardship in one form or another or they wouldn't be here. I have never had the opportunity to have someone co-sign a loan for me but if I needed it I have a very supportive family and very good friends who would do it for me in a second. They are not suckers. They are friends and family that know my character and are willing to take the risk against that. Further, if I was in the position to co-sign for someone ( a close friend or family member) I would do it in a heartbeat. The reason: I know the people that I consider close friends and further, I would not co-sign a loan that I thought I could not repay if it came to that. Co-signing is not irresponsible. Co-signing a loan that you can't afford to take over if the person falls into further hardship or co-signing for someone you barely know is irresponsible.
Re: Another gotcha on cosigns... Hey Cable666, I just thought of something that may help your friend. I'm sure you've seen references to Nelson vs. Chase Manhattan posted. The case basically was Mr. Nelson cosigned for a mortgage for someone. The other person filed bk and Nelson just picked up the slack {good cosigner!}. It wasn't until he applied for credit that he realized he had a bk on his record. Prehaps your friend needs to see a lawyer and see if her case is applicable?
Re: Another gotcha on cosigns... Taking all the emotion out of the process, I'll say anyone is foolish to cosign if they are incapable of assuming the obligation at a moments notice. Because, a lot of time a moment is all the notice you get.
Re: Another gotcha on cosigns... I disagree with the view. I can understand under certain situations that it would be better to not co-sign, but in other situations, it is better. If you have no credit and need to build it, getting a co-signer is better than getting secured credit. My parents have co-signed 2 loans for me, and they know damn well I would never fall behind. I have my car loan paid up to December already. This story seems to assume that the person being co-signed before is always a horrible credit risk, which is NOT true. Of course, some of the deals will go sour, just like the credit histories of many that do. It all depends on who you are dealing with.
Re: Another gotcha on cosigns... There is a HUGE difference between being a co-debtor and being an authorized user (AU). Co-signing for a loan means that you are legally obligated to fulfill the repayment of the debt in the event that the primary borrower fails to pay as agreed. As an AU, you are NOT legally responsible to repay ANYTHING in the event of the owner's default. An AU is just that - a USER - not a borrower. Unless you're an AU on a spouses account (i.e., common law financial/legal responsibility, which applies in many cases regardless of whether or not your name is on the account at all, in any manner), you have NO responsibility to repay any debt that's racked up on that account. And any accounts listed on your credit report(s) showing you as an AU are EASILY removed -- you have NO legal obligation and, therefore, accounts with you as an AU do NOT *have* to be reported to the credit bureaus. Technically, it's an FCRA violation regardless of whether it's paid on time every month or delinquent. The CRA's must report accurate and true information. You have no legal obligation to repay the AU account debt and, therefore, it should NOT be reflected in YOUR credit history (which determines your credit risk). For some reason, many people seem to think that it HAS to be reported on your credit history if you are an AU. That is simply NOT true. I have had various accounts removed from my credit histories that I am/was only an AU on. To me, it's ignorant to have an AU account listed if there is a large outstanding balance on the account. Why should TWO people's scores get hammered (balance/limit ratio) when only ONE has to be -- unless that's your only positive trade line(s). Just my $0.02.
Re: Another gotcha on cosigns... I think that someone is confused. If person A lets person B be an authorized user on one of his credit cards and person B charges it to the max, person A IS responsible.
