Loan Co-Signers Obligations

Co-Signers Beware

In cases of people with no credit history, possibly your children, or people with bad credit, co-signers are needed in order to get a loan, especially a auto loan or mortgage.

The original borrower's credit history or score is not satisfactory to the lender. If a co-signer is presented, the lender considers his credit history and score in determining whether to extend credit.

If credit is granted and the co-signer signs the promissory note, he is as liable for repayment as the original borrower. As a matter of fact, the co-signer might very well be the first party the creditor tries to collect the debt from.

If the original borrower goes bankrupt, the debt is not discharged against the co-signer - unless he also goes bankrupt.

So by co-signing the note, you are guaranteeing that you will repay it if the original borrower fails.

Obviously one should think long and hard about co-signing for another, even a relative, and don't ever co-sign for revolving credit - like credit cards or lines of credit. Your obligation as co-signer can have a very long life, if you do.

No matter how good the original borrower's intentions are, you as the co-signer will face the bill collectors if he gets laid off, runs up too much debt he can't afford, gets sick and can't pay his hospital bills, etc.

If you want to help your children get a credit history started and you know they are committed and industrious, by all means co-sign for them. You will not only allow them to get credit, but at a lower rate, assuming your credit is good.

However, if your child can't get or hold a job, has trouble with drugs or is just plain untrustworthy, realize that you have obligated yourself to repay whatever debt you signed for.

As far as co-signing for friends or business partners or co-workers, I would try to take a pass. Unless you know the borrower and his financial situation very well, you are taking a big risk.

Be careful how you share you good name and credit.