When a loved family member, like a son or daughter, asks you to co-sign a loan for their new $30K car you’re right to hesitate. Sure, you love your children, but more than 30 percent of co-signers get stuck with debt. There are certainly situations when co-signing is fine, but you should always carefully consider what could go wrong and what that will mean for your financial future. More than a few co-signers have taken on the services of credit repair companies to help them manage bad loans they’ve co-signed on. Let’s take a look at all there is to consider when thinking about co-signing a loan.
Reasons You Shouldn’t Co-Sign
A Princeton Survey showed that of 2,000 U.S. adults in 2016 that co-signed on a loan 38% were forced to pay all or part of the loan. Twenty-eight percent suffered a drop in their credit score from late payment or default. Worse of all, more than a quarter said their relationship with the signer suffered as a result of the arrangement.
Even if the borrower makes payments, your name is on the debt, and it will impact your credit score. The use of credit counts for 30 percent of your score. Having your name on a co-signed loan also increases your debt-to-income ratio. It could make it more difficult for you to borrow in the future if you need to.
Other Options VS. Co-Signing
Before you co-sign, it’s wise to make sure you’re capable of repaying the loan if the primary borrower defaults. If you have enough capital, you could consider giving the friend or family member a personal loan for part of what they need. A lender may be willing to loan the other half of what is needed. This strategy will enable the borrower to make the purchase, while you avoid the risks of co-signing.
If you do decide to co-sign on a loan here are some things to consider before you sign:
- Can you afford it? Make sure you have the money to take over full payments if the debtor defaults.
- Prepare for default. Ask the creditor to calculate what you might owe if the loan goes into default. Try to negotiate the terms of the loan to limit your liability.
- Ask the creditor to contact you if the borrower misses a payment.
- Get your own copies of all loan documents.
- Check what rights your state affords co-signers.
Do You Need Help With Credit Repair?
If you have co-signed on a loan that defaulted and it negatively affected your credit, we can help you get your credit back in good shape. Give us a call today, and we will walk you through all the different strategies you can take to expedite your credit repair.