Building credit is difficult. Each of us begins our journey by not having a bad credit. As a result, it can be difficult to get your foot in the door.
For this reason, young adults or those with poor credit scores often turn to older friends and family members with solid credit scores for help with buying a home or car.
So should you be helping a friend or family member by co-signing a loan? The answer is almost always “no”.
It sounds tough, but our Dear Penny inbox is up constantly awash with questions and regrets related to how to co-sign This woman who ruined her balance after signing for a friend and those parents who put their retirement at risk when she signed for her daughter’s car.
“When co-signing, you need to remember that lenders want to borrow money and charge you interest,” said Robin Hartill, executive editor of The Penny Hoarder and certified financial planner. “When they refuse to lend someone, they pass the chance to make money because they think the risk is too great.”
If lenders say no, chances are you’ll say no too.
Risks of co-signing a loan
There are many risks of saying yes to co-signing – and they can affect your financial well-being in the long term. Here are some things to consider before signing a loan.
Your credit is at risk
As a co-signer of a loan, you put the debt in your name. This means that the loan will appear on your credit report and late payments by the borrower will be reported as late payments by you. Any late payments will adversely affect your creditworthiness. If the borrower makes this a habit on a regular basis, you may need to step in and spend your own money to protect your creditworthiness.
Your hard-earned money is also at risk
When co-signing a loan, your signature is not a vote of confidence to reassure a lender. You agree to pay the entire loan if the borrower stops making payments.
Before you co-sign, consider the following: Can you afford to make these payments every month until the car, house, or other funded item is paid off?
Just remember that you have nothing to show for these payments as the borrower is the one who keeps the car, lives in the house, gets the college education, etc. That means, of course, unless the car is taken back or that House is excluded on.
As a co-signer, if you fail to make the payments when the borrower stops, the bank will step in – and it will have an impact Your Recognition. The lender can also sue you, which could ultimately result in a lien on your home or garnishment of your wages.
Their relationship isn’t immune either
Aside from the financial consequences, co-signing for a loved one can also lead to a strained relationship – or even alienation.
Before co-signing, ask yourself the following: If the borrower ultimately decides not to hold up the end of the deal, how will that affect your relationship? Will you be a “helicopter co-signer” who regularly reviews your finances and risks resentment in the process? Do you know how to talk to the co-signer about missed payments? What if your borrower refuses to pay? Are you going to lose this relationship
“I want to warn people to think very carefully about the damage co-signing can do to a relationship,” said Hartill. “Co-signing is something you do to help someone who is important to you. But if they don’t do what they agreed to do and your finances suffer, this relationship will be difficult to improve. “
What To Do When You Co-sign a Loan
Sometimes it’s impossible to say no. For example, private student loans typically require a co-signer, forcing parents to sign their lives in the interest of their child’s education. As a co-signer on any type of loan, you can protect your investment and credit by:
Request monthly bills
As a co-signer, you can ask the lender to send a copy of the monthly statements to you as well as the main borrower. You can also request notifications of missed payments and access to the online payment portal. In this way you can keep track of payments and make them when it is clear that the loan is not or not possible.
In making a payment on behalf of the borrower to protect your creditworthiness, you are setting a precedent. In the eyes of the borrower, you can now make payments anytime they don’t want to.
Schedule a refinancing
The whole point of co-signing for a friend or family member is to help them get on their feet while building their own credit. That means that after a few years of responsible payments, they could have the creditworthiness to process a loan themselves. In that case, you and the borrower could try to refinance the loan without Your signature.
Set the refinance goal from the start of the co-signing process and actively work to motivate the borrower to improve their credit so that they have a good reputation for refinancing in due course.
Petition for a co-signer clearance
As a co-signer, if you are desperate to be removed from a loan, you can request an approval form. However, the main borrower must sign the release form and the lender must approve it. These are two difficult hurdles to jump through.
If the borrower is enjoying a home or car that you paid for, they may not sign the release form. And if their creditworthiness is still low and the lender thinks they are too risky, the lender won’t sign off the form even if the borrower did.
Alternatives to co-signing
Saying no to a friend or family member in need can be difficult, but there are other ways you can help if you are uncomfortable being a co-signer of a loan.
Give a deposit
Often times, a borrower has a better chance of getting approved for a loan if they make a large down payment. To avoid the need to co-sign, offer to pay the deposit as a one-time gift if you can afford it. Alternatively, you can offer to loan them the money for their down payment with a solid repayment plan. Note, however, that there is no legal obligation on you to repay such an informal loan. So don’t give away any money that you absolutely have to get back.
Help build their credit
If the borrower can wait a year or two to buy, offer them to build their credit in a place where they can get the loan themselves. For example you can Make them an authorized user on your credit cardthat can affect their credit score.
Don’t you trust them your credit card? Make them an authorized user, but hold the card and do not give out the card number. Your balance will continue to benefit when you are in charge with the card.
You can also help them improve their creditworthiness by making sure that all payments (rent, utilities, credit card payments) are on time and in full each month over a long period of time. If they are having a difficult month, offer to step in and pay the rent.
Suggest bad credit
Some lenders offer loans to borrowers with bad credit. These loans usually have unfavorable terms such as high interest rates. Offer to pay your friend or family member a portion of their interest on a “bad credit loan” each month until the borrower’s credit is strong enough for the borrower to refinance at a better interest rate with a different lender – and without yours Help.
Timothy Moore is an editorial and graphic design researcher and freelance writer. It covers topics such as personal finance, travel, careers, education, animal care, and automotive. He has been working in this field since 2012 with publications such as The Penny Hoarder, Debt.com, Ladders, WDW Magazine, Glassdoor and The News Wheel. He lives in Ohio with his fiancé.
This article originally appeared on www.thepennyhoarder.com