July 13th, 2017 8:15 AM by Christopher Lear
Avoid co-signing on someone else’s loan.
A new survey shows that 38% of co-signers lost money because the borrower did not make payments (or make them on time). 28% experienced a decrease in their credit score. And 26% said that their relationship with the borrower disintegrated.
In addition, credit bureaus will add the debt (of the co-signed loan) to your credit report and, in some instances, will count the debt against you if you are applying for a mortgage, a refinance or other types of loans.
Before you agree to co-sign on a loan, consider these other options first.
Co-signing on a car loan. Think about helping your child or relatives with a larger down payment instead of co-signing for a loan. If you help with a down payment and require that the loan be paid back to you, have the person sign a promissory note and make payments to you to pay off the down payment amount.
If you really do HAVE to co-sign on a car loan, make sure that you are also on the title of the car.
Co-signing on student loans. On federally guaranteed student loans, co-signers aren’t usually required. Make sure that your child maxes out their government student loans BEFORE turning to private ones.
In regard to student loans from banks or credit unions, check to see if there is a clause that releases the co-signer after the primary borrower makes a certain number of payments on time.
And, if you HAVE to co-sign student loans, have an agreement beforehand that your child will refinance (to remove your name) when they get a job.
Leasing an apartment. First-time renters often have trouble leasing an apartment without a co-signer. For a small fee, renters can hire a co-signer through LeaseLock.com or Co-signing.com.
If you have to co-sign, rent payments are generally not reported to the credit bureaus, so it won’t affect your credit score. However, if the renter defaults, the lease is a legal agreement, which could result in a judgment—which would have a huge effect on your credit score.
So, if you are planning to apply for a loan in the near future, do the math and make sure that you can still qualify with the additional “debt” that you become responsible for. Make sure that you also check your credit report every few months to make sure the primary borrower is making the payments on time.
There is an exception to this rule. If the borrower has been making the payments for 6 months to a year and have been making them on time, a lender may ask you for proof (usually cancelled checks or bank statements from the borrower) that the payments have been made by them and not you. They have the option of NOT counting the payment when qualifying you for a loan.