Loan co-signing: Here’s how to limit your risk


By: Theo Thimou,

OK, so you’ve co-signed a loan for an adult child who needed a car, a student loan or a credit card. Now you’re starting to realize it might not have been such a good idea for you. What do you need to do next?

Co-signing a loan is dangerous to your financial health

Some 17% of people have co-signed a loan for a child or someone else. The most common type of co-singings are a parent co-signing an auto loan for a child. That represents about half (51%) of all the co-signing action, followed by personal loans (24%), student loans (19%) and credit cards (16%).

But here’s the rub: When you co-sign a loan, you’re doing more than just giving a character reference for the person. You’re agreeing to pay the debt if they welch on payments—either intentionally or because they lose a job and can’t find another.

In fact, a survey found that 38% of co-signers had to fork out money for some or all of the debt because the person they co-signed for did not pay as agreed.

Moreover, 28% of co-signers saw a drop in their credit score because of late pays or no pays on the part of the person they co-signed for.

Co-signing a loan creates a long-term financial obligation. It is a hazard that should be avoided if at all possible.

According to a 2012 report by the Consumer Financial Protection Bureau (CFPB) and Department of Education, about 90% of private student loans are co-signed by a parent.

Sadly, a 2014 Citizens Financial Group survey revealed that 94% of parents with a child in college said they felt more burdened due to their children’s college loans. In addition, around 50% of parents did not have a plan to repay their child’s student loan debt.

Here are some additional things to keep in mind

Co-signing a loan will raise your debt-to-income ratio. This can really hurt if you’re applying for a mortgage. Clark has long saidyou shouldn’t go out and get a loan for a car in the months before you plan to buy a home. But your credit score is still at risk if you’ve co-signed a car loan for somebody else.

It may be possible to remove yourself as a co-signer. With private student loans, you may be eligible for a co-signer release once the person you signed for makes a certain number of consecutive on-time payments and has a credit check. But you’ll likely have to stay on the student loan servicer to make this happen. With an auto loan, you can sometimes get off as a co-signer if the person you signed for refinances the loan in their own name.

You may be able to negotiate terms of co-signing beforehand. The Federal Trade Commission suggests that you try to get the following language in the contract: “The co-signer will be responsible only for the principal balance on this loan at the time of default.” That means you won’t be responsible for late fees or court costs if you’re sued over the debt because the borrower is not paying as agreed.

Your untimely passing could throw the borrower into immediate default. Private student loans commonly contain a clause that lets the lender call the loan due in full if you as a co-signer die or declare bankruptcy. The CFPB is recommending people in private student loans try to get a release for their co-signer before something like this happens. They have a series of sample lettersto help you get the job done.

For more information follow this link,

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