Cosigning a Loan; Hero or Zero?

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October 9, 2014 by Lisa Brammer

Last year, one of my daughter’s friends cosigned a loan for her boyfriend, Jake. It started innocently enough, they had gone out to dinner in the city and while they were driving home in the boyfriend’s car they were in an accident. Luckily no one was hurt, but the car was totaled. It wasn’t long before they were off to a dealership with Jake’s insurance check in hand.

As these things sometimes go, they started by looking at affordable choices, but Jake couldn’t help himself and wandered over to the newer, more expensive vehicles. With the help of their salesman Jake picked out a car, agreed upon a price, and started working with the finance guy to get his loan. Unfortunately, Jake had champagne taste and a beer budget—that’s where my daughter’s friend, Nikki, came in. You see Nikki has a steady job, lives within her means, and always pays her bills on time, consequently she has a stellar credit report. The only way Jake could get a loan for this car is if Nikki (or someone like her) cosigned for him.

Here’s what Jake said, “Don’t worry, it’s my loan. You’re just the cosigner,” and “There isn’t any risk for you because I am going to make the payments.” Then there was the “If the roles were reversed, I’d do it for you” line. And my personal favorite, “I’m committed to this relationship, are you?”

Here’s what Nikki was thinking when she cosigned the loan. It is Jake’s loan and I’m just the cosigner. I am committed to this relationship and want it to go to the next level. I’m not worried, I’m sure Jake will make his payments.

It’s too bad she didn’t know what the loan officer was thinking! I bet it went something like this. There is no way I am going to give Jake a loan for this amount. His credit score is too low and the numbers show he really can’t afford the payments. He has to have a cosigner because loaning money to him on his own would be too risky.

Fast forward to today. Jake and Nikki are no longer a couple and here’s why. Jake was late making his payments for a few months and when the finance company notified Nikki, Jake assured her he had it all under control—it was nothing for her to worry about. She believed him until she wanted to buy the condo she was renting. She pulled her credit report and found that Jake wasn’t only late, but 2 months behind on his car payments and this negative information was on her credit report. When questioned, Jake maintained he had it under control, but the company holding the loan had a very different perspective. Nikki soon understood this was her problem and would continue to be until the loan was paid off.

If you are asked to cosign a loan for someone, here is what you should know before you consider cosigning.

When you cosign a loan, you are legally liable to pay off the debt if the person receiving the loan does not. It’s important to understand that the creditor will likely go after you first for payment—as they are not surprised the borrower defaulted—that’s why they wanted someone else on the hook!

If the borrower does not pay as agreed, your credit may suffer. One or two late payments reported on your credit report can make your score nosedive—even if it’s not your fault. The negative information could stay on your report for up to 7 years.

Cosigning a loan could decrease your chances of getting a loan for yourself. Even if the borrower is making all of the payments, a lender will view the loan as yours because they know you could be held responsible for it.

It’s extremely difficult to get your name off the loan. If things go south and you want out, it’s basically so sad too bad unless the borrower can pay off the loan or refinance it. And let’s face it, if they aren’t making payments on time that’s extremely unlikely.

Don’t get me wrong, I’m not saying to never cosign a loan. My husband and I cosigned loans for both of our children when they were getting their credit established. If you decide you are willing to cosign, make sure you do it with your eyes wide open and please have a contingency plan in case things go bad—it’s important to be prepared in the event that becomes an eventuality.

Founded in 1950, United Credit Service, Inc. is a full service, licensed revenue cycle management and debt collection agency in Wisconsin providing highly effective, customized one on one management and recovery solutions for our business partners. We offer pre-service collection solutions as well as traditional back-end collections. Visit our website at http://www.unitedcreditservice.com or call 877-723-2902.

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