When it comes to co-signing loans for friends or family, the risks are enormous. While it might make sense to help out someone you care about who doesn’t have the credit necessary to obtain a loan, the consequences, if they don’t live up to her obligations of repaying the loan, can potentially lead you to financial suicide. The most dangerous thing about co-signing on someone else’s loans is your own credit score. But that is only part of the risk.
Here is are three types of loans that, if you are asked to be a co-signer, you should consider very carefully and then take the necessary precautions before agreeing to help out.
1. Risks & Dangers Of Co-Signing On A Mortgage
After the financial crisis of 2008, banks have made it more difficult for borrowers to take out mortgages. This means that more homebuyers have turned to co-signers for assistance when taking out a home loan. It is important to know that if you do co-sign on a mortgage, you are responsible for the mortgage payments if the homeowner falls behind. If the mortgage holder does fail to pay, the lenders can go after you for payments, something they certainly will do to collect money. You can also be sued in court and even have your wages garnished if the mortgage holder does not pay the loan back.
Furthermore, if the loan goes into default, this huge blemish will show up on your credit score reports. In the event that the loan goes into default, it is critical that you take all the necessary steps to get the mortgage back into good standing. That entails taking over the payments. In addition, it is a good idea to assume ownership of the property. In order to assume ownership of the property, you will need to speak to the lender about obtaining the title for the property and refinancing the loan.
While there is nothing wrong with co-signing on a mortgage for a good friend or family member, approach the deal with caution. In order to protect yourself, reach out to an attorney and ask them to draft an official contract between you and the homebuyer. Since you are offering your financial backing and a good credit score to the potential homebuyer, they should not take issue with your desire to have a contract formally drafted and signed.
2. Risks Of Co-Signing A Car Loan
Again, thanks to the great housing crisis of 2008, it has become a challenge to obtain car loans as well. This means that many friends and family members have found it necessary to have co-signers on car loans. In many cases, when this turns out for the worst, you find yourself with car payments and lack possession of the car. However, that can be avoided if you think ahead. First, make sure that you have your name on the title of the car. Indeed, if you’re name is not on the title, you will find it difficult to claim ownership of that vehicle. Second, always have a set of keys to the automobile. Third, many experts suggest that, unless you are married to the owner of the car, it is against your best interests to co-sign on a car loan. There is always a classic scenario mentioned, that of being a boyfriend or girlfriend. Your boyfriend or girlfriend needs a car. The two of you are in love, so you are more than willing to help them out. So, you go to the dealership with them and gladly co-sign for their new automobile. You make the mistake of not adding your name to the title and you fail to request a set of car keys. Perhaps you two have been together for several years, or perhaps a few months and shortly after you have co-signed for their new car, you have broken up. This is not a situation you wish to find yourself in.
As mentioned, if you do take the necessary precautions, you will be able to make better choices about the situation. If the borrower does stop making payments, and you have your name on the title and you have car keys in your possession, you hopefully will have the ability to seize the car without much hassle. In addition, you will need to reach out to the lender. Inform them of the situation and tell them that you wish to resume payments on the automobile. It is also a good idea to look into insurance on the vehicle. Apparently, in many cases, when a car owner stops making payments on their car, he also stops paying for insurance. If you find yourself in this unfortunate situation, make sure to take possession of the car safely, contact the lender and also inquire about the status of insurance for the vehicle.
Again, many people co-sign for car loans, just as they co-sign mortgages, to help out their loved ones. There is nothing wrong with wanting to help someone out with a car loan. At the same time, it is also important to watch out for yourself just in case something goes wrong and the car owner stops making payments on the automobile.
3. Risks Of Co-Signing A Student Loan
Out of the three loans mentioned in this article, co-signing on student loans is the riskiest and poses the worst penalties if a borrower fails to keep up with their payments. For starters, it is essentially impossible to get rid of student loans in bankruptcy. Congress, over a period of several decades, passed legislation that removed bankruptcy protection rights to federal loans. In addition, in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed and signed by President George W. Bush. BAPCPA targeted private student loans, making it – just like federal loans – virtually impossible to include these loans in bankruptcy.
If a borrower does default on their loans, whether they are federal or private, the financial punishment is severe. It should be noted that federal loans do not require a co-signer. So these words of warning are for co-signing on private student loans. Like the aforementioned loans, when you co-sign on a student loan, you are responsible for the payments if the borrower fails to make them. The risks are steep if a borrower fails to repay their student loans, so this puts you in financial danger. Of course, if you feel strongly about co-signing on a student loan for a loved one, that is your personal choice. However, it is important to know that it can hurt your credit and be a lifetime problem in the event that they can’t pay the loan back.
Co-signing on a mortgage, a car loan and a private student loan is always risky. It is important to know how these loans can affect your credit score and your own financial well-being.