Monday, December 10, 2007

Co-Signers: Don't drag them down with you.

Co-signing is when two or more people enter into a loan together for the purpose of paying it off jointly in the near future. On the surface it seems pretty mundane and every day. The word itself crops up often enough to make it a household word, right? It's at least as common as the words mortgage, co-pay or liquidated assets.

So it doesn't seem like that big of a deal when a bank asks for you to obtain a second (or third) person to co-sign on a future loan. This could be for your small business, home repairs, a car. Anything really, so long as it can be tacked onto an interest rate you can typically get a loan for just about everything. So you don't think twice about it before going off to pester a relative or friend to just sign a little piece of paper to get the ball rolling.

And hey, you're likely going to ask someone you trust, right? Someone you respect as a person, probably a close relative like a sister or a father. Or a close friend, someone who knows you're a good person at heart.

So they jot down their signature, a date and a social security number. They enter into a binding contract with a corporation whose business is to, gasp, make money. They nod dimly at the grim bank agent explaining the nitty gritty details behind the contract.

Your friend or relative knows you need their help, so even as the bank agent explains the situation they just nod dully, keeping you in mind. After all, they've known you for years. You'd never get them into trouble, right?


The situation is simple. If a bank is asking for another individual to co-sign on your potential loan, they believe you are incapable of paying it off. After checking out your credit history, income and other outstanding loans they come to the conclusion that you cannot possibly pay them back in a timely manner.

They are likely a large, multinational corporation who specializes in lending. They have legions of employees and third party vendors at their disposal. They are in the money industry and if they are in business to offer you the loan to begin with, chances are they are very, very good at it.

They don't want to turn away a willing client. Clients pay the bills and keep their CEO fat and happy in the Hamptons. So if they're outright rejecting you without another signature, there is good reason.

They're looking to cover their own ass because they feel you will fail.

Listen to them. Chances are if you're in a dire financial situation it is for good reason. This is not to say that you're a bad person because you were rejected for a loan, just bad with money. Use it as a learning experience, not as fodder for self pity.

It's one thing to enter into a risky situation for your own benefit if you are the only person at risk. But it's quite another to enter into a risky situation for your own benefit at the expense of your relative or friend.

The bank is asking for a co-signer so they have some insurance you're going to pay your bills on time. And if you fail, through whatever reason, your co-signer is going to have to pick up the slack. All of a sudden they're going to be awash with your dirty laundry.

And hey, if they can't pay, guess what's going to happen to their credit report? It's going to tank. You're going to be spreading your own misery to someone you care about. Someone who just wanted to help you out because they cared about and trusted you.

Keep this in mind when you see the words "co-signer required".

It appeared on your contract for good reason, so investigate it. Obtain a copy of your credit report. You can do this for free, by law, once every 12 months. You can read up on the issue at the Federal Trade Commission's page on the subject here and obtain a copy of yours here.

Once you have your credit report, investigate it. You're going to come across the reason why the bank is requiring a co-signer fairly quickly, whether it's your outstanding credit card debt, your low income job, or your four car loans.

But instead of hunting down your best friend, rectify the issue completely before attempting to reapply for the money you requested earlier. And at that point only enter the agreement by yourself, or with your spouse. If it's for personal use, it should be personally paid off, don't you think?



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