co-signing loans

Co-Signing for a Loan: 4 Things to Consider First

Hollis Colquhoun — Fri, 29 Oct 2010 12:00:10 +0000

There are many situations where you might be tempted to co-sign for a credit card or loan. Here are a few examples:

An 18-year-old college student can't get a credit card on his own because he only did odd jobs over the summer and recent law changes require that a student be 21 or have sufficient income from a job to pay for a card. Because the child's low income doesn’t make the cut, his parents agree to co-sign for the card, hoping it will teach him how to develop good spending habits and start building a good credit profile.
A young woman is in a difficult financial situation: Her car broke down, and she needs to get a new or slightly used car to get to her job. She has to finance part of it and needs a co-signer because her credit isn't good enough. Her grandmother agrees to co-sign for the car loan.
A man wants to put an addition on his house, but he's self-employed and doesn't have a great credit score, so he asks his fiancé to co-sign for the loan since she has a steady job and a good credit score.

Co-signing for a loan to help your child, relative, or friend sounds like a noble act, right? You’re just being the credit booster. However, everyone should be aware of the ramifications of co-signing a loan for anyone, including your child or best friend.

You Are the Borrower

Being a loan co-signer means you are the borrower in the eyes of the credit bureaus, so this loan will appear on the main borrower’s credit report as well as on yours. The timeliness of the borrower’s monthly payments could also impact your credit score if they aren‘t made each month.

Your Future Loans Can Be Affected

If you are planning to get a new loan in the near future, the co-signed loan may negatively affect your chances of getting a new loan or may increase the interest rate you would have to pay because of your higher debt-to-income ratio.

Co-Signers Pay Back

According to the Federal Trade Commission (FTC), studies have shown that of all loans that have had co-signers and gone into default, 75% end up being paid by the co-signer. In some states, if the debt holder misses a payment, the creditor could come after you (the co-signer) for the money. Creditors and banks ask for a co-signer because the potential borrower — your child, relative, or friend — doesn’t have the credit rating and/or income to support the loan. So yes, you would be helping them with your fall-back guarantee, but you would also be responsible for the debt if anything goes wrong.

You Are Fully Responsible

If your child, relative, or friend defaults on the loan payments, not only would you be responsible for paying back the loan, you would also have to pay any late fees and accrued, unpaid interest. The worst case scenario would be that the unpaid debt goes into collections, the creditor sues you, and the court gives the creditor the ability to put a lien on your house or garnish your wages. Of course, your credit score would take a beating in the process.

Consider Carefully

Co-signing for a loan to help your child establish credit may be a good idea if you make the amount small enough that you can pay it if your child defaults, and if you set the monthly payments low enough that your child can afford them. The purpose of your co-signing in this case is to help your son or daughter establish a good credit history, so take the time to explain the consequences of good and bad borrowing behavior. Building a good report will be very important for your child when he or she is looking for a full-time job or wants to move into an apartment.

According to the FTC, a co-signer may be able to limit the potential liability in advance by having a clause in the loan agreement stating you are only responsible for the principal of the loan and that you must be notified if there is a missed loan payment. State laws vary regarding a co-signer’s legal obligation, so make sure you understand your rights and responsibilities in your state before you sign.

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Guest Post Blurb:

This is a guest post by Hollis Colquhoun. Hollis has over 20 years of experience in the financial industry, is an Accredited Financial Counselor and co-author of Women Empowering Themselves: A Financial Survival Guide. Contact her at Women Empowering Themselves. More articles by Hollis:

This article is from Hollis Colquhoun of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Sexually Transmitted Debt: Eewww!

Nora Dunn — Thu, 23 Oct 2008 02:42:47 +0000

You can contract more than just disease by sleeping with the wrong person…watch out for sexually transmitted debt, which can creep into your sex life while you remain blissfully unaware. Your doctor won’t pick up on it; there is no blood test for this one. Your bank book and credit score though: they will bear the brunt of this contagious and insidious plague.

Scott & Sheila had a fiery and tumultuous relationship – one they both loved and hated. Communication was not one of their strengths, and they had very different relationships with money and respective financial backgrounds. Bank accounts aside, they shared many things, including Scott’s credit card, Scott’s credit rating, and Scott’s cash. Sheila never had any of the above, so when it came time to buy a car, a big tv, and any other assortment of elaborate toys at her beckon, Scott was the one to pony up the cash.

Of course, because they were a couple, it didn’t matter that it was Scott’s credit card and Scott’s car loan. They would both pay everything off together, and ride off into the sunset hand in hand. Right?

(….crickets chirping….)

Sadly, no. They broke up shortly after the last round of purchases, and Sheila managed to kick Scott out, rendering him homeless, with no cash (she drained their bank account), and nothing more than the clothes on his back, a new car loan, and an over-the-limit credit card. Sheila even (initially) kept the car. No matter anyway – Scott couldn’t even afford to put gas in it.

Making no judgment as to what happened behind closed doors to warrant the breakup, Scott was irrefutably the victim of sexually transmitted debt: a virus that took him many years to overcome, and one that he even inadvertently passed on to his next relationship before finally kicking.

Although the scenario above happened with relative innocence, there are people out there who are in the business of sexually transmitted debt. Elderly people or those with disabilities are prime targets. The veil of an initially fulfilling relationship can be lifted to reveal blatant abuse and use of one person’s financial stability for the other’s gain.

Regardless of whether there are honorable intentions or not, there are some ways we all can protect ourselves against sexually transmitted debt:

Avoid Joint Banking

To be an official couple, you don’t need to do your banking together. In fact many married couples get by just fine with mortgages and kids in tow without ever signing on the dotted line together.

If it is easier to have a joint account to pay for household expenses, then simply deposit the minimum amount of money into that account necessary to cover the bills, and enjoy your personal account for the rest. It doesn’t have to be a demonstration of a lack of trust; in fact managing finances separately can allow for one spouse to surprise another with a gift, and also for each spouse to maintain a degree of fiscal responsibility –an empowering and necessary skill at every stage of life.

Don’t Sign as a Guarantor

If you don’t want to see your partner’s debt become your own, then don’t become a guarantor! When you guarantee a loan, you are actually guaranteeing the bank that if the loan recipient can’t or won’t repay the loan, you will. Sure, your employment history or income may look better for qualification purposes, but unless you are prepared to take on the debt as your own, don’t do it.

Here are a few questions to ask yourself if you have been requested as a guarantor:

Can I afford to make the payments if my partner can’t or won’t?
How will our relationship be affected if I am suddenly on the hook for the loan?
Would paying out the loan render me bankrupt or put me in financial duress?
If it is a business loan, do I truly understand the business and its finances?
Can the borrower increase the loan amount without my knowledge?
Am I being pressured at all into making this decision?

Co-Borrow at your own Risk

Similar to signing on as a guarantor, your personal financial history might bode well for co-signing a loan with your partner. This will be inevitable if you end up getting a house or car together, but you can add protective measures by ensuring that both spouses need to sign to redraw or increase the loan amount. Generally speaking, only co-sign a loan for an item you both can derive enjoyment from.

Joint Credit Cards = Joint Debt Traps

I had numerous clients who hid debt from one another all the time. Hubby and wife (very solid couples in some cases, I might add) had joint credit cards, but only one person opened the mail. That same person also managed to run up the cards to beyond their limits with impulse shopping purchases. If you have a subsidiary card issued for your credit account, you – and only you - are completely liable for the outstanding amount if your partner goes awol.

Discussing finances openly is difficult for many, if not most couples. And I must note that married and common-law couples (depending on where you live) often have legislation in place that prevents one spouse from escaping the relationship with all the assets while the other bears the brunt of all the debt. But even marriages can dissolve with a few nasty surprises: I have a friend who had no idea that her ex was spending all their money on booze, and many years (and legal battles) later she is still paying off tens of thousands of dollars of their “shared” debt.

Knowing this, how do we avoid all sexually transmitted debt and in so doing not shed trust from our vocabulary or decide to be single for the rest of our lives? Simply put, there is no way to cover off all the bases. One of the keys to a relationship is trust. Love is blinding, but keeping your eyes open and refusing to co-sign a loan might be wrongly construed as a lack of trust. It is a sticky web to navigate, and the only truly effective way to make it through is by talking everything through – even if the initial conversation is painful. If the relationship is to be fruitful – emotionally and fiscally – then both parties have to come to the table with their cards visible, and trust that they’re playing the same game.

This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: