Thinking of co-signing for someone?
Your sister desperately needs a new car, but she has a poor credit history. The bank will not lend her the money with- out a co-signer. She comes to you for help. Should you co-sign? After all, she is family. Luther Gatling, president and founder of New York City-based Budget and Credit Counseling Services (www.buccs.com), says, "Think twice."
Gatling, who handles some 30,000 clients per year through his credit counseling firm, finds that many people don't understand the risks of co-signing for another person's debt. "Many co-signers think they are simply vouching for the borrower's integrity. In fact, the co-signer is 100% liable for the debt," he warns. That means you should be sure you can afford to pay the loan yourself should the debtor default. Also, any property you pledge on the debtor's behalf, including your home, could be confiscated if they fail to pay. Says Gaffing, "That guarantee is the primary risk of cosigning. For instance, should you co-sign for your sister's car and she misses payments, the creditor will immediately come after you in addition to your sister."
Full liability is not the only risk of co-signing. "With regard to credit cards, co-signers should know that the creditor can raise the debtor's credit limit without the co-signer's knowledge, making the dollar amount of the debt unpredictable," advises Steve Rhode, president and cofounder of Rockville, Maryland-based Debt Counselors of America, a nonprofit organization.
Further, the financial risks can last longer than the co-signer originally intended and for purposes they didn't foresee. Gaffing cites the misfortune of a female client who co-signed for a credit card for her husband. Unfortunately, the marriage soured and the woman learned that her husband had purchased gifts for a sweetheart with the credit card. "This woman found herself $30,000 in debt for which she received no benefit. She now must make monthly payments on the debt despite the fact that her marriage is over," says Gaffing. Her recourse? None. She is responsible for the debt no matter how unfair the situation seems. Gatling notes that bankruptcy was not an advisable option, because her credit report would have been scarred for 10 years and her other property would be in jeopardy.
As a potential co-signer, you should also understand that your liability for the debtor's loan will appear on your credit report and may hamper your own ability to borrow in the future. "If you can, just say no," Gaffing recommends. "They may not like it, but you will probably save the relationship."
If you still want to help your loved one, there are alternatives. Assuming you can afford it, lending money to them directly is an option. That way, at least your credit report is unaffected. However, if you just can't resist the temptation to co-sign, protect yourself. Add a clause in the contract stipulating that the lender must notify you if the borrower fails to make a payment. This will allow you to investigate the problem or make back payments. Also, obtain copies of important papers, such as the Truth-in-Lending Disclosure Statement and the loan agreement. Says Gatling, "Know what you're getting into. Accept your responsibility and you won't be surprised if the debtor can't meet the payments."
RELATED ARTICLE: Major of co-signing
* Co-signer is 100% liable for debt
* Debt appears on co-signer's credit report
* Primary borrower can increase credit card limit without co-signer's consent
* Credit card debt has no termination date
RELATED ARTICLE: FYI
"Anyone who pays out 45% or more of their monthly income to creditors is considered a high credit risk and shouldn't take on anymore debt," according to James Agnew, executive vice president of Consumers First (800-497-6222 or www.cfdebt.com), a firm that helps consumers resolve debt and credit issues. Before you co-sign for anyone, insist that they calculate their debt-to-income ratio (see formula below), since it's a good indicator of whether they have debt problems.
Debt-to-Income Ratio = Monthly Amount of Debt/Monthly Gross Income
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|Date:||Feb 1, 2000|
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