Co-signing can be a big help for those with less-than-stellar credit. But it also can lead to some big financial headaches for those lending their good names.
There are some things you need to know before you sign on the dotted line.
Lenders sometimes require a co-signer when the borrower has had some credit-related hiccups and is trying to get back on track. Financial institutions also use a co-signer for young borrowers who haven't established credit.
Co-signers – who are used because they've proven themselves creditworthy – solidify the loan.
"If the borrower is a little bit younger, we want to get them off on the right foot so that they start their experience with credit going in the right direction," says Dupaco's Aaron Plein.
Typically a relative or friend of the borrower, co-signers are used for everything from auto loans to personal loans, according to Plein, vice president, branch manager/service delivery at Dupaco's First Avenue branch in Cedar Rapids, Iowa.
Financial institutions look for two main qualities in a co-signer: Someone who is strong credit-wise, and someone who has some net worth.
"It just shows they have a proven track record of borrowing and being able to pay things back, so they can pick up the broken pieces if the borrower isn't making the payments," Plein says.
If you're asked to co-sign a loan, ask yourself these questions before saying yes:
- How familiar are you with the borrower? Do you trust this person?
- Do you believe this person will live up to his end of the bargain and make his loan payments?
- Do you understand your responsibilities as a co-signer? You are obligated to make the loan payments if the borrower does not. "That's a huge thing," Plein says. "Some people think, 'I'm just signing that I think this person will make the payment.' No, you're signing that 'I think they'll make the payment, and if they don't I will step in and make the payment.'"
- Are you financially stable enough to pay off the loan if the borrower can't?
By Emily Kittle