The Benefits and Issues of Co-Signing a Loan
Co-signing on a loan may help the applicant get a better deal, but can also cause some financial turmoil down the line
Follow these steps to make sure it’s a good idea to co-sign:
Know what you are getting into
Co-signing on a loan or credit card is a serious matter that should not be entered into lightly. Essentially, when you co-sign on a loan, you are taking on legal responsibility for the account, and it will appear as your obligation on your credit report. Should the other person miss payments or default on the loan, your credit reports will show the delinquencies and the creditor may require you to pay.
Do the math
Depending on your financial situation, getting a co-signer on a loan may or may not be a good idea when you apply for a loan. Work with your lender to calculate what rates you could receive alone and what rate you could receive with a co-signer. Does it still make sense to get a co-signer?
The buddy system
If you choose to be a co-signer, make sure that you pick a person who is trustworthy, you will be in contact with for a long time, and who understands his/her responsibility. Family members, spouses and close friends are good options. Co-signing for coworkers or people you barely know can lead to credit problems.
Breaking up is hard to do
Once the account is opened, it’s very tough to remove a co-signer off the loan. The party keeping the account will need to assume, close or refinance the loan in order to terminate the co-signing agreement. Typically, a divorce decree or other agreement between two parties that establishes responsibility for payment of an account does not relieve an individual of his liability to the creditor. The individual must still repay the loan, although he may recover from the other party. Unless the creditor releases a party from an account, a divorce decree or other agreement between two individuals will not stop the account from being reported on each individual’s credit reports.
Keep an eye out for trouble
If you have co-signed on a loan, check your credit reports from TransUnion, Equifax and Experian regularly to see how the other person is maintaining the account. If you notice a late payment, call the person and talk about his/her financial situation. Addressing a potential problem early can help prevent credit problems later.