Should I Co-sign?

Under what circumstances should I co-sign

Should I co-sign?!

It is NEVER WISE to co-sign for a someone other than your spouse in my humble opinion. I have seen many, many parents who were clients that damaged their credit score because, in a bout of compassion for someone else, co-signed a loan. These warm hearted people were confident that someone who could not qualify for a loan on their own, would pay for a loan on their own.

Often, there are legit reasons that someone doesn't qualify for a loan. Could be that they don't have reliable income or only seasonal income. Lenders may be a bit skiddish about granting a loan with monthly payments when the job only has regular pay for 9 months. Some construction positions are not year round or a school bus driver who receives no pay when school is not is session or countless other jobs.

Maybe the person changes jobs too often to give the lender comfort. Stability is important to lenders. Consider how difficult it would be lend give someone $20,000 for a car when the person making the purchase has changed jobs four times in the last year. No warm and fuzzy feelings there.

Many people have positions that include income that is not easily verified like a waitress or waiters who rely on tips. Hair stylists, massage therapy and any services that are often paid by cash fall into this category. The challenge with these types of jobs is that sometimes people have a tendency to report less than full income. When it becomes time to borrow money...the income cannot be verified. You tell the lender I make $5000 but the taxes show you make $2000. Doesn't generate a lot of trust although lenders expect this issue with the self employed borrowers. But remember that banks and lenders have to justify the decision to lend to their superiors. Not reporting all income can make it difficult to borrow.

Also, lenders like security and often borrowers do not have sufficient collateral to secure the loan.

None of the reasons above were do to a low credit score or poor pay history which is a whole different scenario. If someone cannot get credit due to pay history, then do not co-sign for them. PERIOD.

If the person who needs the co-signer is your child, saying no can be difficult. The bond between parent and child is powerful. Most of the co-signing I come across is parent for a child. If you are going to take this leap of faith, know that YOU are responsible to the lender. YOU are the reason the loan was made by the lender. YOU are the key. Also be aware that:

  • If the child does not pay....they will go after you.
  • If the child files bankruptcy....they will go after you.
  • If the child pays slow or late....they will report this on your credit.
  • If the child pays on time...they will report this on your credit.
  • If you apply for credit that you need....the new lender will count the co-signed loan into your debt ratio and that could cause you to be denied.

YOU are the key.

If you are going to co-sign for a son or daughter then:

I recommend that you require that your son or daughter provide you with online access so that you can monitor payments 24/7. If there is ever a problem then you will /can know of it immediately so that a solution can be sought.

I also recommend that you require your son or daughter to sign on the loan with you. This way they are establishing credit for the future.

I do not recommend that you make the payments and have your son or daughter pay you direct. Too often the parent is too lenient and not as strict as the bank. The debt owed can ruin family meals if the payments have not been prompt.

Plus they should pay by check so that they can prove that who is making the payments. No money orders, or cashier checks. If you apply for a loan and can prove with cancelled checks that your son or daughter is making the payments, many lenders will not count the debt against your income (if the payments are being made on time). And by using the cancelled checks can count the payments as a credit reference if they apply for future loans.

So my recommendation is DON'T co-sign.

If you decide to help a child...consider following my suggestions to protect yourself.

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