There may come a time when a friend or relative of yours will ask you to co-sign a loan they are about to request. At first, it may seem as simply doing a favor for someone you care about, but do you really know the risks you are taking when agreeing to co-sign a loan? You may want to think it twice before you go ahead and sign your name for that friend or relative. Co-signing a loan makes you a guarantor and that means that there are several risks and responsibilities involved if you chose to do so. You are the guarantee that that loan will be paid for, you are accepting the burden of someone else’s debt.
Try to imagine a situation in which you are about to go to a bank to ask for a loan. Maybe you want to purchase a house, but then they denied the loan and you simply do not know why. You have been responsible with your finances, if you pay your bills, and you never run late with a payment; you can only wonder why this is happening to you.
Then, you remember that some time ago you accepted to co-sign a loan with a friend of yours who was not able to pay his debt at time. When you agreed to become his or her guarantor, you accepted all the risks and responsibilities that come with it, you have to answer for this debt in the event of late or non-payment. This can have a terribly negative effect on your credit history and can make your name show on the black lists of banks and credit cards companies; you could even lose some of your possessions and even your house as payment for the loan.
“Co-signing a loan makes you a guarantor and that means that there are several risks and responsibilities involved if you chose to do so. You are the guarantee that that loan will be paid for, you are accepting the burden of someone else’s debt”
The first you should do is fully understand what it means to co-sign a loan. To put it simply, being a guarantor means that you are the guarantee that the loan will be paid for. It means that if the person that you are co-signing for is unable to make the payments of a debt for whatever reason, then you are responsible for that loan. When someone goes to a bank to ask for a loan and this person does not have a favorable background, or the salary is not high enough to cover the dues, the bank will not feel safe giving money to such a person. In these cases banks ask for a co-signer or a guarantor for that loan, someone with a better background that can be held responsible for it.
It is quite common to see parents acting as co-signers for their children when they are still too young to have a credit record that is good enough to ask for a medium or big loan. There are also cases of friends doing this to help each other. Neither of these cases is free of less than desirable outcomes though. When the person that acquires the loan is incapable of paying for it, the burden falls on their families or friends and this can cause a lot of strain in their relationship.
Consider now going deeper and knowing the risks and responsibilities of co-signing a loan. The most prominent risk will always be the fact that you are agreeing to be responsible for a debt that is not yours to begin with. The rest of the risks may vary depending on the type of loan in question; be it a mortgage, a loan to buy a car, or even a loan for a company. Different banks have different policies for loans as well.
Depending on what the contract states, the bank may have the power to withhold your monthly salary or even claim things that are legally yours such as your vehicle or even your house as payment. And as if this was not enough, as the guarantor in a loan that has not been paid your name may figure on the black lists of banks and credit cards companies, making it extremely difficult to access loans and credits of your own in the future, thus ruining your financial stability.
Long story short, there are three main risks that you must consider before you go ahead and co-sign that loan. If the receiver of the loan cannot pay, you have to pay and if you are not able to do so, the bank can take legal actions against you and all of this goes to your record; it is a stain that is hard to remove.
We are not saying that you should never co-sign a loan if a friend or family member asks you, but we do recommend that you consider this before doing so:
- Imagine that it is your money. Would you trust that person with it?
- If the roles were inverted, would they co-sign for you?
- Do you think that the person you are co-signing for is really capable of paying?
- Are you aware of this person’s credit records?
Take this into account and ask yourself these four questions before co-signing anything. It is not about being a bad person but being careful because this is also a risk for you.
Co-signing a loan means only a bunch of risks, there is no bright side to this other than helping out a friend or relative in need. In any case try to avoid being a guarantor to someone else just to be safe. However, should you ever decide to do so try to only do it for a family member or a close friend; people that you can trust. It would be unwise to do it for someone that is not close to you. Never allow the shame of saying “no” ruin your financial future!