The Other Side of Cosigning: Potentially Risking or Ruining Your Credit to Help Someone Else
George Boelcke CCP
May 09, 2007
In the history of credit nobody has ever been asked to cosign with the admission that the borrower really can’t afford to pay it back. We want the loan really badly, we’re totally optimistic that everything will be fine, and that – well “you’re only cosigning.”
Wrong! Cosigning makes you just as liable for the debt as if it were your own loan. You’ll be on the hook for the total amount, the full term and all the interest, fees and charges. This debt will also show on your credit rating, drop your FICO score and affect your future borrowing ability, because the payment is now also part of your debt load.
The most common cosigning happens when one of your kids wants to purchase their own car. They’re pretty responsible and you somehow feel an obligation to help them out. But first you need to slow down the process because it’s likely your son or daughter (OK most likely your son) found the car they absolutely have to buy that day. In addition to checking out the car and other due diligence, make sure you sit your son or daughter down and get a rough idea of the payments, the cost of gas, insurance and an agreed-to amount that’s reasonable for maintenance.
That alone likely doubles the original car payment – but you’ll still have to show them that this is net income and they’ll have to earn a whole lot more on a gross basis (before tax and other deductions come off their income) to have the net amount left over that’s going towards the car. Plus, they’ll need to understand this money is now legally committed and they don’t have the ability to change their mind, or get out from under it, in a week. When it becomes really painful financially, there isn’t an easy out – other than selling the vehicle, likely at a substantial loss.
If you’re still in agreement and want to help, you may now want to use the finance or business manager of the dealership as a resource person. They deal with a number of lenders and nobody in the dealership gets paid until they vehicle is approved for financing. But be careful and get a second quote as the business office is THE largest profit center in the dealership!
The first step is always, always to consider kicking in a down payment instead of cosigning. This limits what you’re on the hook for. A large down payment will almost always take away the need for you to cosign. And never cosign a line of credit, since it’s a permanent loan, and comes with the ability to keep drawing out more money while the debt can be around for more than a decade at minimum payments.
If you do agree to cosign, you should take charge and get involved. As the questions to make sure the loan is a good deal, sign only if the loan makes sense, the rate is competitive and the term is as short as possible. Also make absolutely sure that the documents all use your address. It’s the only way to guarantee that you know what’s happening. If not, the arrears will go on your credit report and have a big affect on your credit rating before you even know there’s a problem.
The: It’s Your Money book has a whole section on borrowing from friends and relatives as well as alternatives to help someone first establish a credit rating and FICO score on their own. But no matter what, think it through, explore the many alternatives and protect yourself, just in case. Because knowing is always better than hoping.
Wrong! Cosigning makes you just as liable for the debt as if it were your own loan. You’ll be on the hook for the total amount, the full term and all the interest, fees and charges. This debt will also show on your credit rating, drop your FICO score and affect your future borrowing ability, because the payment is now also part of your debt load.
The most common cosigning happens when one of your kids wants to purchase their own car. They’re pretty responsible and you somehow feel an obligation to help them out. But first you need to slow down the process because it’s likely your son or daughter (OK most likely your son) found the car they absolutely have to buy that day. In addition to checking out the car and other due diligence, make sure you sit your son or daughter down and get a rough idea of the payments, the cost of gas, insurance and an agreed-to amount that’s reasonable for maintenance.
That alone likely doubles the original car payment – but you’ll still have to show them that this is net income and they’ll have to earn a whole lot more on a gross basis (before tax and other deductions come off their income) to have the net amount left over that’s going towards the car. Plus, they’ll need to understand this money is now legally committed and they don’t have the ability to change their mind, or get out from under it, in a week. When it becomes really painful financially, there isn’t an easy out – other than selling the vehicle, likely at a substantial loss.
If you’re still in agreement and want to help, you may now want to use the finance or business manager of the dealership as a resource person. They deal with a number of lenders and nobody in the dealership gets paid until they vehicle is approved for financing. But be careful and get a second quote as the business office is THE largest profit center in the dealership!
The first step is always, always to consider kicking in a down payment instead of cosigning. This limits what you’re on the hook for. A large down payment will almost always take away the need for you to cosign. And never cosign a line of credit, since it’s a permanent loan, and comes with the ability to keep drawing out more money while the debt can be around for more than a decade at minimum payments.
If you do agree to cosign, you should take charge and get involved. As the questions to make sure the loan is a good deal, sign only if the loan makes sense, the rate is competitive and the term is as short as possible. Also make absolutely sure that the documents all use your address. It’s the only way to guarantee that you know what’s happening. If not, the arrears will go on your credit report and have a big affect on your credit rating before you even know there’s a problem.
The: It’s Your Money book has a whole section on borrowing from friends and relatives as well as alternatives to help someone first establish a credit rating and FICO score on their own. But no matter what, think it through, explore the many alternatives and protect yourself, just in case. Because knowing is always better than hoping.