Co-Signer’s Checklist - Answer Before Signing on the Dotted Line
Written by: Kristy Welsh
Last Updated: August 1, 2017
Whether you feel honored or cursed by a request to co-sign on a loan, the key to making the right decision is in asking the right questions of yourself. It should never come down to whether you should, but whether you want to in light of the facts.
In many of our articles regarding ways to rebuild your credit, establishing new credit may mean finding a person (with good credit) who will be willing to co-sign on a loan — and that person just may be you. If you are approached by someone who is trying to rebuild and re-establish their credit, and they ask you to co-sign on a loan, we have these five questions you need to ask yourself before you go down that road.
1) Do You Know the Person VERY Well?
Under just about any circumstance, the length of a relationship is less important than its quality.
On the one hand, you have family members you’ve known all your life and friendships that go back years. But considering how reluctant most of us are to discuss money matters, you may find you know relatively little about their financial history.
On the other hand, you may have a newer friendship with someone who you feel you’ve gotten to know very well indeed – someone who talks openly about past financial mistakes and, hopefully, how they’ve changed their ways.
Either way, make it a point of sitting down with the person and covering the following points:
- If you don’t know already, ask them what circumstances led them to have the financial difficulties that make it hard for them to get a loan on their own.
- Ask to see financial documents (e.g., personal financial statement, bank statements, pay stubs).
- Ask them to sign a statement of intent to refinance the loan in their own name as soon as possible (unless a co-signer release comes first).
- Let them know you will be keeping monthly tabs on the loan to be sure payments are being made in full and on-time.
2) Are You Prepared to Take Full Responsibility For the Loan in the Event the Borrower Cannot Make the Payments?
Should the borrower be unable to make their payments, you will be held fully responsible for loan. This includes payments not made due to the borrower’s filing of bankruptcy or death.
3) In the Event of Default, Are You Prepared For the Co-Signed Account to Negatively Impact Your Credit Score?
Should you be unable or unwilling to make good on payments, are you prepared for your credit score to take the hit? Note, this will include a negative listing on your credit reports, as well as demands from creditors and/or collection agencies.
4) Do You Have an Exit Plan?
Just because you are co-signing on a loan today in no way binds you to it for the life of the loan. You can (and should) plan to request a co-signer release as soon as you are eligible to do so, which may be after a period of 2 years of timely payments.
In lieu of a co-signer release, the borrower may apply for refinancing of the loan. Make sure this is part of the plan from the beginning, recorded in writing and signed by both of you.
If it’s a credit card account, transferring the balance to a different card may also be a practical option.
5) Are You Doing it For the Right Reasons?
Never allow obligation or guilt to talk you into co-signing on a loan. In fact, if you are experiencing any negative feelings or doubt, it is probably best to pass on the co-signing request.
In fact, the only time to co-sign on a loan is if everything about it feels good and looks right. This includes the borrower’s ability and intention to repay the loan, of course. But also a genuine desire to help this person – a desire so strong and sure that you are willing to bet your own money and good credit on it.