Helping out loved ones in a time of need is certainly a noble endeavour. However, cosigning a loan is one of those favours that requires a great deal of judgment and vigilance.
Why do you need a cosigner?
If a financial institution requires a cosigner to grant an individual a loan, it’s because they are unsure of that individual’s ability to repay the loan, or because that individual does not meet the new qualifying requirements.
In the first case, it may be because of a sullied or inexistent credit history.
In the case an individual does not meet the new qualifying requirements for a mortgage, the addition of one or many cosigners allows for the adding of revenue and the reduction of debt, which will benefit the credit application. Read our article on qualifying to find out more.
By becoming a cosigner, you become jointly responsible for the debt. By taking on the same obligations as the main borrower, you are significantly lowering the risk for the lender.
Be it for a friend or a family member, here are the things you need to consider before signing your name at the bottom of a credit application.
In what other ways will my signature help the borrower?
By adding your name to the credit application, you can help the borrower avoid having to deal with borrowers whose motivations and practices are unsavoury. We’re especially referring to those with predatory interest rates and aggressive collection practices.
Financing might be an excellent way to help someone find their footing, but under these types of circumstances, it may wind up costing him a leg.
Before signing, here are a few tips you can give the borrower to help him improve his credit rating. If he’s recovering from bankruptcy, this article might also come in handy.
Am I willing to change my lifestyle if I have to take on the payments?
You have to be realistic and consider the possibility that this debt might become yours alone. If you’re not willing to change your spending habits if you have to take on the entire monthly payments, you’re probably better off not signing the request. You have the means to pay, but do you want that cutting into your leisure, holiday or other expenses?
Can my credit rating afford it?
The loan will appear on your credit rating as soon as it goes through.
If you’re thinking of seeking out a loan for yourself in the near future, make sure adding extra debt to your credit history won’t come back to haunt you. Even if you have an agreement with the main borrower stating he is responsible for the payments, your credit file shows you are equally responsible.
Do I trust the borrower?
Very often, the borrower asking you to cosign is doing so in good faith. Here are a few common examples:
- Youth with no credit history
- Independent worker who can’t qualify
- Temporarily out of work
- A person who qualified under the old regulation, who can’t transfer their loan for a better rate because they no longer qualify under the new regulation
- A person who wants to refinance to do renovations, but who no longer qualifies under the new regulation
A youthful mistake or a rough patch can leave a mark on a credit report. Normally, you should have a better perspective on the borrower’s situation than a financial institution. If the person doesn’t seem to have improved their spending habits, you should say no.
If you do accept to sign, however, it is highly recommended you keep a close watch on the borrower’s repayment. Ask the financial institution to send you account statements each month so you can correct the situation quickly if need be.
In the case of a mortgage, it is extremely important to see if the municipal and school taxes have been paid. If not, the city or the school board can claim a legal hypothec on the property and seize the house. The cosigner will then be left with a huge debt and no asset to show for it.
The bond of trust that defines your relationship with the borrower can change over time. All too often, family members, former friends and ex-lovers receive calls from collection agencies for loans they had completely forgotten about.
- A cosigner helps an individual access funding he couldn’t get otherwise.
- The cosigner has the same responsibilities as the borrower when it comes to repaying the debt.
- By cosigning a loan, you must remain vigilant and keep a close eye on the account statements.