A Co-Signer’s Nightmare

Think it can’t happen to you because you trust them? Think again!

I’ve had numerous consultations with people who have co-signed a loan and want to be removed because their credit is going up in flames. All their hard work to build great credit is torched in just a matter of months and they want out! I always feel bad after these consults because legally there are few options available to them.

There’s a saying that history repeats itself, and it’s no different under these circumstances. If the borrower was unable to get a loan due to bad credit, it means they were not paying their bills on time or they were defaulting on obligations. The same can repeat once you co-sign the loan and often proves true.

Why is a co-signer required for a loan? A co-signer is a person- family member, parent, or friend- who promises to repay a loan. Although the co-signer may not directly benefit from the loan, they agree that if the borrower fails to pay the loan they will be equally responsible for the debt. A co-signer is needed because the lender will not guarantee the loan based on your credit history and income. The co-signer usually has a better credit score and a lengthy credit history.

Co-signing directly benefits the borrower and puts the co-signer at risk. Unfortunately, many underestimate the risks they are taking on. First, co-signing a loan may reduce your credit score; secondly, the loan also appears on the co-signer’s credit report and affects the debt-to-income ratio; and thirdly, it can ruin your credit if the monthly payments aren’t paid on time.

Besides ruining your credit, it can be very hard to remove yourself as a co-signer. There are two ways to remove yourself as a co-signer on loan: (1) the borrower could re-finance the loan with the lender and remove you, or (2) the loan agreement may contain a release clause allowing the co-signer to be removed once the borrower demonstrates history of timeliness.

If you are considering co-signing for a loan, please consider the pros and cons as the disadvantages far outweighs the benefits. There are very few if any legal remedies available to help co-signers to get out of the obligation. I would not recommend anyone co-sign a loan unless they’re financially able and willing to repay the loan if defaulted or does not mind the consequence that could result.

Someone in need may beg or try to guilt you into co-signing a loan on their behalf; however, your credit and years of hard work can be easily undone with one or two missed payments. The final decision is up to you, but choose wisely.