Co-Signing A Risky Decision
Just in time for Halloween we have a good horror story for you.
Jon and Jane are in love. Things are just peachy. Then one day Jane asks Jon to co-sign on a credit card for her. Of course Jon does because he’s in love. Well, after awhile things go astray and Jon notices Jane’s carefree spending habits. Sadly, they break up and soon after, Jon is getting calls from a creditor saying he owes them because Jane is not making the payments. Jane’s now with Barry, spending like crazy on her credit card and not paying it off. Jon is single and working two jobs to pay for his ex’s expenses, all because Jon co-signed on a credit card. Pretty scary huh?
When you co-sign a loan or a credit card you assume all responsibilities of that account if the applicant cannot or will not pay. This includes any late fees, interest, or court costs and attorney fees. Collectors can pursue you by the same means that they would use to collect from the applicant. The Federal Trade Commission states that for every loan that is co-signed, 3 out of 4 co-signers are asked to repay the debt. In some cases, the creditor can collect the debt from you without trying to collect from the primary debtor.
Consider the following if someone asks you to co-sign with them. Assume that you may have to pay on the loan. Is the monthly payment out of the range of your budget? Could you comfortably make payments if it were your loan? If it is not their first loan there is a significant reason a lender is requiring them to have a co-signer. The person who asks you may be very trustworthy and have honest intent to pay on time and to the penny. What if something were to happen to them, like they get injured or become unemployed and don’t have any income. Now what? Now the creditors are going to come after you to collect. If you cannot afford to repay, they may pursue legal action against you and destroy your credit. You are putting your credit score at risk by co-signing, even if you are not asked to repay on the debt. The primary applicant may make late payments that will show up on your report. By co-signing on an account you can ruin your credit, which in turn can require you to get a co-signer on any future loans or credit cards you might need to take out.
There may be times when it will be inevitable that you will have to co-sign a loan. For example, you may have a son or daughter that need a co-signer for a private school loan because they have no established credit. Your teen may want a credit card for college “emergencies” that you will co-sign for. Again, you are taking a risk. I know you want to trust your children but an emergency according to a college student could be gas for spring break or that there is a huge sale at The Gap. They will find it easier to use each time. Many students are not ready for that kind of financial power and even more can not come up with the funds to pay off what they charged over the month. This leaves the parents holding the bill and receiving the countless phone calls.
Married couples often co-sign loans together. Either for joint possession or one of them may have come into the relationship with credit problems.
If you still decide you need to co-sign for someone, there are some things you need to consider. First and foremost, make sure you can make payments on the account. Go with the borrower and try to negotiate with the lender on what your obligations will be. You may be able to get the lender to agree that you are only responsible for the principal, and to exclude you from any late charges, court costs, or attorney’s fees. The creditor is by no means obligated to, but it can never hurt to ask and include it in the contract.
Another thing you might want to ask to be included is that whenever the borrower is late or misses a payment, to contact you immediately. That way you can handle it before it becomes a big problem. You will want to make sure you get copies of the loan contract, and any other important papers. If the lender does not give you copies, get copies made from the borrower.
There are other ways you can help someone out without having to co-sign on a loan. Have the borrower check his credit history to make sure there are no mistakes on it that are causing lenders to require a co-signer. If you know that the borrower is having some financial problems, suggest that they meet with a Certified Credit Counselor. A counselor can steer them on the right path of making better financial decisions and begin to rebuild their credit.
Pioneer Credit Counseling is a bonded, non-profit credit counseling agency offering debt management programs, financial counseling, bankruptcy counseling and housing counseling nationwide. Call our friendly counselors today at 800-888-1596 or visit www.pioneercredit.com.
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It is our policy at Pioneer Credit Counseling not only to help people get out of debt, but also educate in sound budgeting practices.
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