Know Your Rights

Disadvantages Of Co-Signing

When a family member, loved one, or close friend asks you to assist them with a credit purchase, you naturally want to help.  The advantages are that you are providing someone with a great opportunity, and if they make all their payments on time, you can both benefit from the good credit history. However, there are greater disadvantages.

The first is the potential that the person you are signing with won't be able to make the payments.  Whether it's a good reason like illness or disability, or a bad reason like irresponsibility, the effect on your credit is the same.  If the person does not make their payments, the creditor will then look to the co-signer.  If the creditor does not get their money, everyone's credit reports will suffer.

Secondly, if you, the co-signer, decide that you no longer want to be part of the contract, you are stuck.  Once you are part of the contract, the only party that can let you out is the creditor themselves.  No matter what agreement you may have made with the other co-signer, if your name is on the contract with the creditor, the creditor can ask you for payment.  This often happens during divorces.  If spouses who co-signed on credit accounts obtain a divorce, even though the decree may designate one spouse as the responsible party, the creditor can still look to both.  Again, the creditor has the right to be part of the decision to allow one of the co-signers out.

Another disadvantage is in the case of a car loan.  Often the co-signer has no possession or use of the vehicle.  They simply co-signed so someone else could drive the car.  If the car breaks down, is destroyed or damaged, the potential for missed payments increases greatly.  If the co-signer does not live with the person who has the vehicle, payments may be missed unbeknownst to the co-signer until the creditor calls for payment.

While co-signing for another person may be admirable, there are potential disadvantages for co-signer.  Before signing the agreement, sit down with the person seeking your help and gauge what kind of risk they will be.  Just like the creditor wants to make sure their new customer is a good bet, you want to make the same determination.

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