Cosigning a loan is risky business. Most experts will agree that it’s never a good idea. According to the FTC, as many as 3 out of 4 primary borrowers default on their financial obligations as set down in the loan agreement leaving the cosigner responsible for payment. This shouldn’t be surprising since, it’s the reason they required a cosigner in the first place: they were not good credit risks. They either had too much debt already in place or they already had a history of non-payment.
Individuals who simply want to help out a friend or a family member should consider other options rather than cosigning a loan. If you want to assist another individual in developing a positive credit history, give them $3-500 to get a secured credit card. If they make most charges each month and pay it off every month, they will immediately start amassing a history of on time payments. If the issue is that someone you know actually needs the money, simply give it to them. It’s a far better option than cosigning a loan.
When you consider the rate of default on cosigned loans, you’re practically giving the money away when you cosign anyway, but you’ve got a lot of additional fees and taxes tacked on to the total. In addition, you’ll probably end up with an ugly spot on your credit report and a friend that no longer feels comfortable hanging out with you on a Saturday night. That’s not to mention the late fees and collection fees that will fall at your doorstep. Contracts might not even include requirements to notify secondary borrowers of collective actions being taken so you might not even be aware there’s a problem until the car has been sold at auction, you are being sued for the difference, your credit is trashed and the debt has been sold to a nasty collection agency.
Even if you’re one of the lucky 1 out of 4 cosigners and the primary borrower always pays on time, the amount of the loan will be counted towards your debt to income ratio (used for calculating your credit score, obtaining loans on your own behalf, etc.)
It’s a tough situation to find yourself in, but even if you love the one calling to ask if you can cosign their car, home or personal loan, you simply have to say no. Regardless of how much they need it or how much you want to believe they will follow through on assurances that they will pay, you can’t afford the ugliness that almost inevitably comes along with cosigning for a loan.
Finding yourself in financial trouble is tough, but there’s nothing harder than finding yourself in that unenviable spot as a result of someone else’s failure to pay. Avoid bankruptcy by making smart financial decisions. First and foremost – just say no to co-signing. If you have additional questions on how to avoid bankruptcy or how to recognize when bankruptcy is the only option left, contact the experienced Southern California bankruptcy attorneys at Westgate Law.