Please Don’t Co-sign
I have worked with thousands of clients who have come to me with all kinds of credit issues. In every case we have been able to help them get those issues corrected and help those clients get their credit loan ready.
There are some things that people do that can have epic impact on their credit. Bankruptcy and divorce are two of the biggies. It should come as no surprise to you there. We all have heard the horror stories about one spouse holding the credit of another hostage, or creditors failing to properly report the accounts that were included in a bankruptcy, and as a result trashing a person’s credit.
One very big action, that does not immediately come to mind for people, is co-signing on a loan.
I understand why people do it. But, from a credit perspective, I have to strongly advise you never do it. When you co-sign a loan, you are opening yourself up to a pandora’s box of potential problems and credit pain.
Most of the clients I have dealt with, that have co-signed a loan, are parents that signed with one of their children. Usually they have signed on a note to purchase an automobile. Now, I’m a parent, and I get it. You want to help your child out. You want them to have the best opportunities. You want them to have it better than you did.
But the bottom line is that they are never really going to have it good until they can be responsible for themselves. That would mean that if a car is important, they make a plan and work that plan and buy the car themselves. It will take a lot longer, but it will empower them and save you from disaster.
If you want to help them, teach them to follow a budget, how to save money and how to develop their own credit profile. Give them the tools and teach them how to use them. Don’t just give them the result. They will never appreciate it and you will be creating an entitlement monster.
But more importantly, you will avoid the epic disaster should they start missing payments or default on the loan. Now, you would be amazed by how many clients that have told me that they didn’t think they should be affected by the actions of their children, in these cases. It is almost shocking at times.
If you co-sign a loan, you have to remember that you are really getting your own loan, in your name, that you are responsible for. Only you are having the bills for the loan sent to someone else and you will never know it is not getting paid on time or at all. Also, the collateral that is securing the loan, the car, someone else has total control over.
If they start making late payments, your credit is damaged as if you were the one missing the payments. If the car gets repossessed, it is physically taken away from the child, but financially taken away from you. Now, because of someone else, you don’t have the car, and you are now on the hook for the remaining amount owed on the car, minus the money the bank gets for selling it at auction after subtracting the cost of selling it, which is next to nothing. (I have seen a forty-five thousand dollar truck sell for a few thousand dollars at auction, and after selling fees, the original owner still owed thirty three thousand dollars on a vehicle they will never see again.)
That’s not all. All late payments are going to directly reflect in your credit. A single 30 day late on a loan can cost you 50-100 points or more, depending upon how good your score is to begin with. It will take you 6-8 months to recover most of the damage caused by that single 30 day late pay.
If the loan defaulted and there was a repossession, voluntary or otherwise, there will be multiple late pays and even more damage. Plus a repossession of a vehicle is just as damaging to your credit as a foreclosure on a house. It will not only cost you even more points on your credit, but it will, in many cases, prevent you from getting a mortgage for 2-3 years.
The same things will happen to your child’s credit, but if they were having you co-sign, they were not likely to be thinking about a mortgage for a while. It is far more significant for you.
What’s more, the bank is not going to go after your child alone. They are going to come after you. If you give them trouble about paying, they can take you to court and get a judgment against you, which opens the door to aggressive collection actions and another big negative on your credit.
Now, I know not all kids are going to put you in that position, and that not every person you might co-sign with is one of your kids. I also know that many people co-sign on a loan and never have a problem. But let’s face it. Kids are generally not very responsible. They are kids, not adults. That is why they need you to co-sign in the first place. The same generally goes for anyone else that would want you to co-sign for them.
So do yourself a favor. Stand strong and don’t co-sign. You will avoid the possibility of great pain later.
But if you have been bitten by co-signing a loan with someone, a reputable credit restoration company like Heartland Credit Restoration can really be a big help in getting things back on track and your credit loan ready. Give me a call for a free consultation.