Is It a Good Idea to Co-Sign a Loan for Someone?
By Julie Jaggernath
Have you ever been asked to co-sign a loan or cell phone plan by a friend or family member? Maybe someone close to you asked you to be joint with them on a credit card. Co-signed and joint debts usually start with the best of intentions. But if anyone has trouble or is unwilling to uphold their end of the agreement, things can quickly get complicated.
When your name is on a credit agreement with someone else, whether you’re joint or you’ve co-signed for them, it’s not a 50/50 responsibility. Each person is 100% responsible for whatever is outstanding. If the debt is with a former spouse, unless there is a new legal agreement with the lender to sever your joint liability, you’re both still responsible.
Who Decides How Much Each Co-Borrower Must Pay?
You become a co-borrower when you make a credit application with someone else. The primary borrower could be either the person who started the application process first, the one with the higher income, or the person who has the stronger credit rating. There can be several co-borrowers, especially when the loan is large. The responsibility of the co-borrowers (joint applicants and/or co-signers) is to ensure that all of the required payments are made. However, how much each of you pays is left up to you to decide.
Why Does Someone Need a Co-Signer?
Someone needs a co-signer when a credit application in only their name is not strong enough. Lenders look at income, credit rating, and assets when evaluating a new application for credit. If a lender has any doubts about someone’s ability to honour their obligations, they will look for ways to strengthen the application. One way to do that is by asking the applicant if they have a close family member or friend who would be willing and able to co-sign for them. If a co-signer is not an option, using assets as collateral might be possible too.
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What is the Application Process When You Co-Sign for Someone?
Co-signers go through the same application process as the primary borrower does. Your income is verified, you must consent to a credit check, you need to disclose your assets and liabilities, and debt servicing ratios must be adhered to. It is as if you are taking on a new loan or credit account because if the primary borrower defaults on their payments, you must step in and make them yourself.
Can Co-Signing Affect My Credit Rating?
Co-signing or becoming joint with someone can either help or hurt your own credit rating and credit score because the debts are treated as if they are 100% your responsibility. Whether you think of the debt as “yours” or not, in the eyes of the lender it is.
Payment information about any kind of joint debts is reported to the credit bureaus each month for all borrowers. If you aren’t sure that your partner, son/daughter, friend, or loved one is making payments on time and in full, you may want to take over doing that. For example, you could ask them to e-transfer you their payment or give you the cash. That way you can make the payment to the lender yourself and aren’t left wondering if it was made or not.
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Will Co-Signing Allow Me to Control Someone’s Spending?
Co-signing for someone does not automatically give you control about the choices they make with their money. This can be frustrating, especially if you see them spending on what you think are less-essential expenses and then they have trouble making their payments.
If your friend or family member’s spending could be of concern to you, it might be better to find a different way to help them with their finances. You could help them establish and live by a household budget. If they’re dealing with debt, you could help them consider viable options to get it paid down and repair their credit rating. Simply obtaining a new loan or credit card or receiving a gift of cash will not instantly change their money habits and credit behaviour. Be cautious when entering into a joint or co-signed debt agreement; it is not a decision to make lightly.
Should I Give Someone Money Instead of Co-Signing?
If you’re thinking about helping your friend or family member with a loan or gift of money, make sure that your own needs are taken care of first. Remember, it’s always okay to say no when someone asks you for financial help. Important relationships can be hurt because of disagreements over money. If your loved one values you as much as you value them, they will respect your boundaries. Know how much your budget can handle so that you don’t get into financial trouble as well.
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Can Joint Debts Be Split Up Later?
It is not always possible to split up joint and co-signed debts later on because each borrower must qualify on their own. This means applying on their own merit, with their own income and consenting to a full credit check. The lender wants to know an individual can handle all of the payments on their own. The reason for this is quite simple. When debts are joint and payments fall behind, the lender can demand repayment from all those who are joint. The more people responsible for a debt, the greater the likelihood that it will be repaid in full.
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How to Find Alternatives to Co-Signing a Loan for Someone
When the cost of living is soaring and interest rates are going up, it can be tempting to co-sign for a friend or family member to help them out. But before you agree to do that, consider other ways to help a loved one who is struggling financially. If your friend or family member simply wants to rebuild their credit rating, there are ways they can do that on their own and without potentially jeopardizing your credit score in the process. Contact us now and we’d be happy to answer your questions and provide you and your loved one with guidance and information.