The Fate of Co-Signers

  • By Jillian Taylor-Mancusi

 

I often meet with debtors who have had their parents co-sign a loan for them. By then, it is too late to give them the advice they needed before taking that step.

What everyone in a co-signing arrangement needs to realize is that the bank or other lender has asked for a co-signer because they do not think the debtor is a good credit risk. That is, they think that there is a very good chance that they will need to collect that debt from the co-signer, not the debtor. Lenders are in the business of risk management. They know what to look for, and how to assess someone’s credit worthiness. If they think someone is a “good risk”, they will not ask for a co-signer. If they think the person is a “bad risk”, they will minimize their risk by asking for a co-signer.

What does the lender look at to make that determination? They will look at your employment – are you steadily employed, and how long have you been with your employer? Is the employment position permanent or short-term? What is your family income? Why are you borrowing money? For example, if the loan is for a car, or a house, they will have something to take back as security. If it is for a vacation, they are taking a greater risk.

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Many people fail to realize that if there is a default on the loan, the co-signer will be responsible for the debt. The co-signer needs to consider this carefully. Many people think they are simply vouching for their friend or family member, whereas they are actually accepting liability for the debt. If, for example someone is considering co-signing a loan for their adult son, they must first to decide whether they can afford to pay that debt themselves. Remember, the lender thinks this is a good possibility, and they have lots of experience with assessing risk. I often ask parents who are considering co-signing, “Can you afford to pay the loan yourself? If not, do not co-sign.”

What about those people who have come to us, with their debt already co-signed by a family member? If they cannot pay the debt in full, they are going to be leaving their co-signer with the debt. This causes a lot of heartache and regret.

If you are facing this or other debt problems, please contact us today.

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