Co-signing is an all too common practice, and gives you the opportunity to help another person. However, this responsibility comes with great risk, and little reward.
For example, you might co-sign for a car you never drive, a house you never live in or even a student loan for someone else’s college education. When you co-sign a loan, you essentially agree to repay the loan yourself.
A survey from CreditCards.com reveals the dangers of co-signing and why you SHOULD NOT do it.
- 28 percent of co-signers saw a drop in their credit scores because the primary borrower paid late or not at all.
- 38 percent of co-signers had to pay some or all of the loan payments because the primary person did not pay.
- If your income is not high, you are more likely to be pulled into a co-signing nightmare. The survey found that 58 percent of co-signers who make less than $30,000 a year had to pay some or all of a credit card bill or loan they co-signed.
- Most co-signing requests were for auto loans, followed by personal loans, student debt and then credit cards. About half of the people who co-signed were parents.
Here are some additional dangers of co-signing a loan.
- You are not considered a backup borrower. You are equally responsible for the first payment to the last.
- If the loan or credit card is not paid, the lender can start collection actions on you right away. Do not believe that lenders first go after the primary borrower and then the co-signer. Most likely, lenders will target “the person with the better potential to pay.”
- If collection actions are pursued, you could end up paying late fees and even have your wages garnished.
- Late payments and collection actions are reported on your credit report.
- This may limit your ability to borrow because, as a co-signer, you are on the hook for the debt.
- Even if the person you are co-signing for is responsible with money, you cannot predict what the future holds for his or her finances. What if the person becomes unemployed or unable to work?
As one consumer wrote, “I have told more than one relative that while I can guarantee their willingness to pay, I cannot guarantee their health or employment.”
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