It is so tempting to say yes when a loved one asks you to co-sign for a loan they so desperately need. Regardless of how large or small the loan may be, adding your name to someone else’s debt is a very serious financial step.
When you co-sign a loan, you’re signing a legal contract that holds you responsible for the entire debt. If the primary borrower gets behind in payments, the bank will go after you. Plus, it will probably be reported on your credit record – affecting your borrowing power in the future.
To make matters even worse, the bank can do more than ruin your credit rating. It can sue you and get a judgment against you for the amount of the loan plus interest. You would need to go to court and disclose all your assets and face the possibility of wage garnishments, bank account attachments and so on.
Often, it’s our children who turn us into co-signers. It’s an innate desire to help them launch their financial future. The good news is that you can help your kids without putting yourself on the hook for their debt. If your child wants a credit card and needs you to co-sign, don’t. Instead, go through the countless mail solicitations with him or her, choose a card that works for you and become the primary borrower yourself with your son or daughter as the co-signer. That way, you will agree on the card’s usage, set a limit on that particular card and help build your child’s credit. You will have a close eye on the monthly statements.
Remember, collectors go after the person who offers the best chance of recovering the money. If a loan becomes delinquent, a collector can choose to call you, harass you, rather than your friend or relative.
What if you’ve already co-signed and things have gone south?
If you’re already liable for someone else’s debt, it’s likely you’ll have to pay it off. Before you do that, please know you can negotiate with the lender. Often, companies will even reduce the amount you owe them if they know you’re trying to work on repayment. They’d rather agree to a reduction in debt than wait months or years to get something (if anything) from you.
Negotiating to reduce your debt does take time though. You may want to consider finding a debt consolidation specialist who will negotiate on your behalf.