Credit Myth - Co-signing a loan is not risky

Myth: There is very little risk in co-signing a loan for a friend or family member. By cosigning a loan, I am doing them a favor.

Truth: Never Co-sign a loan for anybody, unless you are prepared to pay back the entire amount on your own.

Creditors love cosigners for a reason. It provides them with extract insurance should the initial borrower default on their payments.

If you look at it from the creditor’s perspective, here is how they view a co-signer. Debt is the most aggressively marketed product in our culture today. Creditors and lenders must meet sales quotas for their loan production. Therefore, if lenders can project the likelihood of a loan going into default with reliable accuracy, then a co-signed loan gives the lender a higher percentage of the loan/credit card not going into default. Even with this said people unwisely cosign for friends and family every day.

Most of those that do cosign usually do it for emotional reasons. Common sense could not take us on this ride. To begin with, we truly believe that the person we are cosigning for will really pay back what they own because we know them. That is the trap. Parents cosign for a young couple to buy a home. Why do they need a cosigner? Is it because they could not afford the home in the first place? Parents cosign a car loan for their son or daughter to help them learn to be responsible. Unfortunately, what son/daughter needs to learn first is: if you cannot afford to pay for something, do not buy it!

Finally, what happens if we do allow our emotions to get the best of us, we think we are doing the right thing and we cosign a loan? Typically what happens is we, the cosigners, end up paying the loan off, as well as risk damage to our own credit report.

Say for example you cosign for a car, the lender will not contact you when the loan is paid late every month, but your credit is damaged every month. The lender will not contact you before they are about to repossess the car, however when they do, you will now have a car repossession on your credit report. Then, they will contact you to pay the difference between the debt and the below-wholesale repo price they got for the car, which is called a deficit. If the lender did contact you, there is nothing you can legally do to force the sale of the car, because you don’t own it; you are merely on the hook for the debt. When you cosign on a house you will get the same results.

Therefore, unless you are ready and willing to pay the debt yourself, NEVER cosign a loan for ANYBODY!