Do You Know the Risks of Cosigning?

Do You Know the Risks of Cosigning? Cosigning can be a tricky matter. On one hand, what do you do if your best friend asks you to cosign their loan to buy a new car? What if your son or daughter needs a cosigner for their college tuition? Both of these circumstances occur on a regular basis. Since we’re talking about your best friend or your kids, agreeing to cosign might seem like an obligation.

On the other hand, what happens when your best friend or kids are unable to pay back their loans in a timely matter? Do you see where this is going? If not, let me break it down for you in the following scenario. Jack will represent you, and Jill can be your best friend or your daughter.

Jack: Hey, Jill! What’s going on?

Jill: Not much, Jack. Just looking into buying a new car.

Jack: Lucky you. New cars are nice but can be pretty expensive.

Jill: I know. I have my car all picked out. All I need now is a cosigner.

Jack: ……..

Jack doesn’t like where the conversation is headed but also remembers who he’s talking to.

Jack: I’ll be your cosigner if you need one.
Jill: Thank You!

Being the good friend Jack is, he couldn’t turn down his best friend Jill. OK, so Jack agreed to cosign for Jill’s car loan. No big deal, right? Fast-forward a year later. Jack receives a voicemail from a creditor named Becky.

Becky: Jack, my name is Becky and I’m a creditor associated with Jill’s car, the one that you cosigned. I’m calling to let you know that we haven’t received any payments from Jill over the last two months. Since you cosigned, you owe us some money.

You ever heard the saying, “Nice guys finish last?” Well if you’re the “nice guy” in this situation, you very well could end up finishing last, meaning you owe a large chunk of change. You’re probably wondering by now how exactly the whole cosigning process works. Before you scribble your signature down for someone else, understand the risks involved. Let me explain.

When a person goes to apply for a credit card or loan, the lender must determine how probable it is the person will pay off their debts. A person that has a poor credit history, or someone that doesn’t have one at all (such as a recent high school graduate), tells the lender the individual isn’t responsible enough to pay the debt off alone. The main reason a cosigner is requested is because a lender doesn’t believe the will pay on time. This is where you, the nice guy, come into play.

When you cosign for someone else, you’re essentially taking over responsibility for the loan. As far as your credit goes, if the person you cosigned for misses a payment, the records show thatyou also missed a payment. The missed payment will be reported on your credit score. If too many payments are missed, the creditor can come after you.

How can you avoid finding yourself in Jack’s position? When it comes to cosigning for a friend, sometimes it’s better to be honest and just tell them you don’t feel comfortable being put in that situation. In terms of your kids, follow these steps to ensure you don’t end up paying off the majority of their loans:

Teach money-management early: Give your kids an allowance at a young age. Let them make decisions for themselves when it comes to purchasing select items. Teach them the more they save, the more they can get later on. Help them realize if you don’t have enough money for something, you can’t afford it until enough money is saved.

Credit/debit card tips: This is an area a lot of people get in trouble. When I first started using my credit card, it was so easy to swipe the card and forget that I’d eventually have to pay the debt off. I learned quickly that you do, in fact, get a bill for everything you swiped on your card. That was a day I’d rather forget.

Help build credit: Open a joint account with your child when they get to be around the age of 16 or 17. Enforce strict rules, like if they spend over a certain amount, they’re responsible for all charges. My dad opened up a joint account with me when I first started driving. I was allowed to use my card to fill up my gas tank, but any other charges were my responsibility. It allowed me to build some credit because my dad always made sure the card was paid on time, while also teaching me financial responsibility.

How many of you have cosigned for someone? Has it ever come back to haunt you? Tell us your stories in the comments section below!

 

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