Anyone who has a low credit score (600 and below) will have a very tough time receiving a loan, whether it’s an auto loan, mortgage, student loan or credit card. This is because the lower your credit score, the riskier it is for a bank to lend money to you, since low credit scores are due to late payments on bills, debt and other irresponsible financial habits. However, if you can find someone with a high credit score (720 or above) to co-sign the loan, then it is likely that you’ll receive the loan. Sounds great, right? Wrong! Here’s the catch: if you stop paying the loan because you lost your job and can’t afford it anymore, the creditors will go after the co-signer and force them to pay. If the co-signer can’t assume the payments, well then their credit will be ruined – and you’re not off the hook either – your credit score will drop too!
You may ask, “Why would anyone want to co-sign on a loan for someone?” It’s a great question and below are some of the reasons why people co-sign on loans for other people and more reasons/scenarios on why co-signing is moronic:
Usually family members ask other family members to co-sign on their loans. Many parents co-sign on their children’s student loans. Parents often feel guilty if they don’t co-sign, since without a co-signer, students cannot receive private loans. On federal student loans, students do not need co-signers, yet most students have to take out private loans because federal loans are not sufficient enough to cover the high costs of college, thus creating the co-signing issue. Private lenders will not lend money to young people because they do not have credit. By co-signing on loans for their children, parents are committing financial suicide! Parents are essentially risking their credit scores and savings account by co-signing, if their child defaults on the loan. Parents must make the tough decision and refuse to co-sign on loans. If this means that your child cannot attend their dream school, then so be it. Advise your son/daughter to attend a less expensive school or rely on grants/scholarships instead of private loans that require co-signers. You’ll both be better off in the future!
Bottom line: Don’t co-sign for any loans, whatsoever! Let’s say you’re the co-signer for your relative’s auto loan. Even if you are able to make the payments in case your relative stops paying, what happens if the interest rate rises and now the monthly payments are double what they originally were?…now how are you going to afford the payments? Co-signers must be able to pay off the entire loan, since there is a possibility that the person you are co-signing for (your relative, in this case) won’t be able to make the payments – if this happens, you, as the co-signer, are 100% responsible for your relative’s loan that you kindly co-signed for.
It’s a tough decision to refuse to co-sign on a loan for a family member. No matter how desperate they are, it is a very bad mistake to co-sign on a loan. Unless you have the money to pay off the entire loan and then some (in case the interest rate on the loan rises), do not co-sign.
What are your thoughts on co-signing? Comment below!
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