The Risks of Co-Signing

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    Definition

    • A co-signer is someone who essentially serves as collateral for a loan. Co-signers generally have good to excellent credit scores and credit histories. A person with poor credit or who does not have established credit often needs a co-signer before a lender will approve him for a loan. A co-signer's signature tells the lender that the co-signer promises he will repay the loan amount if the borrower cannot. A co-signer does not have to be related to the borrower or even know the borrower.

    Credit Score

    • A co-signer's credit score is directly tied to the borrower's payments. If the borrower is 30 days late, that mark will also appear on the co-signer's credit report. While the borrower is tasked with the responsibility of repaying the loan, the co-signer assumes the ultimate responsibility of repaying the loan in its full amount, so every negative mark the borrower incurs from the loan reflects on the co-signer. Generally, the occasional 30-day-late mark won't drastically lower a person's credit score, but reoccurring late payments or 60- and 90-day-late payments can result in severe credit score penalties.

    Repayment

    • Because a co-signer's signature guarantees he will repay the loan in its full amount, he must do so if the borrower fails to repay the loan himself. If the co-signer does not repay the loan, the lender can send the account to a collections agency or even file a court judgment. Judgments can result in wage garnishments and bank levies. It's unlikely a lender will pursue a judgment if the loan amount is small, such as under $2,000, but larger loans carry an increased risk.

    Obligation

    • Although a co-signer doesn't make the monthly payments on a loan like the borrower does, the Federal Trade Commission states lenders still view the loan as an obligation the co-signer has made. Until the loan is paid off, lenders may be unwilling to approve the co-signer for financing he would typically qualify for. If the co-signer has few loans or little debt, lenders probably won't view the co-signed loan as a problem.

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