Co-signing for a personal loan or auto loan can usually do more harm than good for most people. It’s only natural that we would have good intentions and may want to “do the right thing” for a friend or loved-one by sponsoring or co-signing a loan for them.
Let’s first examine what it means to be a co-signer. A co-signer is required when the original potential borrower fails to establish reasonable grounds to a future lender that they themselves should qualify for a loan based upon their own individual merit. Because one is determined to be qualifiable via their credit score it stands to reason that in the absence of a good credit score one would need a co-signer. A co-signer would be someone with a solid credit score based upon a strong positive payment history, along with a good job and steady income.
The difficulty lies in the rationale for co-signing. Co-signing is never a business decision made from keen analysis; instead it’s done based upon raw and pure emotion. Your loved one cries, begs, pleads for your help and argues the case for needing your help based on tugging at your emotional heartstrings. This is never good in business, and when making business decisions. And, make no mistake, credit scoring is strictly business. A good credit score can save you thousands of dollars over the years…and conversely, a bad credit score can cost you additional thousands of dollars in the form of unnecessary interest payments and fees.
Co-signing allows your “partner” to piggyback your stronger credit score when applying for a loan because you now become a co-applicant. The lender can now determine the original borrowers credit-worthiness based upon their credit and now your stronger score added.
The problem arises when although your newfound partner makes every intention and effort to pay the loan/note on time; old bad habits creep in and stall those intentions. Bad habits can be in the form of overspending, poor budgeting, lack of stability in their workplace, gambling, etc. Once payments become late, it’s now not only their poor credit score that gets dinged….but more importantly your good score as well. Moreover it is good old reliable you that becomes on the hook for the payments. You essentially are assuming responsibility. So, in conclusion, think long and hard before committing your good score that you presumably worked hard to establish to help another during their unfortunate time of financial distress.