My husband is chiming in for another Finance Friday. This topic is one of the most important financial decisions most consumers make. Some make this decision for their children, spouse, significant other, or simply a friend. I will go over the best scenarios of when you should and shouldn’t Co-Sign.
When & When Not To Co-Sign
1. What Does It Mean To Co-Sign?
I must go over this first as a lot people have very bad information on what it truly means to co-sign for someone. A Co-Signer or Joint Applicant is someone that is responsible for their share of the liability. For Example: If you co-sign for your sister so she can be approved for a vehicle, apartment, credit card, furniture, or anything that expects monthly payments or rent, then you are 50% liable for that item. Meaning if the item is for your sister, and she makes the payments on time every month, you will also benefit from that payment history and more than likely, your credit score will increase as well. The drawback is that you will be affected negatively if those payments are late, missed, or if the car is repossessed, that repossession will be the same as you repossessing the car which will surely decrease your credit score. Co-Signing for an apartment is slightly different as those late payments will not show on your credit report unless the landlord or agency has a monthly credit reporting plan in which case can affect your credit score.
2. When Co-Signing Is A Good Idea
This is probably most asked question from my clients and probably one of the toughest to answer. I say that because there is no crystal ball to tell us when if a person will ever be late or miss a payment. The only time it would make sense to co-sign is if and only if you can have some control in the finances and making the payments on time. For example: you co-sign for your child but you have their checking account automatically transferring the money to your account every pay period to ensure an on time payment. Or another example would be if you take care of all of the finances for that person. I wouldn’t be a problem as you have access to their money coming in and going out. Being married and co-signing for each other is not a problem in the beginning as there is a level of commitment. But keep in mind what may happen in the future.
3. When Co-Signing Is A Bad Idea
Anytime you have to hope, wish, or pray a person makes the payment on time, co-signing for this person may be a bad idea. I have seen every scenario from Parent and Child, Husband and Wife, boyfriend and girlfriend, friend and friend, family member and family member, and even random people co-signing for people they don’t know that well! Remember, co-signing is more than just being responsible for making the payments. Both parties also own 50% of the vehicle. Meaning if one person wants to trade it in or take it from you, you will have a problem as they own half. Of course, you can’t chop a car in half but banks overrule courts as someone has to make the payments each month regardless of who drives it. Of course, the biggest problem you can have is when the paying party is late on payments or worst, the item goes into default. Not only will your credit be equally damaged, but you are also eligible to be sued in a civil suit. To avoid all of this, remember, it’s ok to say NO!
As you can see, there is no perfect time to co-sign as there is always a risk. Many things can negatively happen and with so many crazy things taking place in people’s lives, its probably best that you say NO to co-signing. Remember, there MANY banks that will finance items without the person needing a co-signer. A nice down payment will always help the situation out or a higher credit score of course. Whatever you decide, don’t say you didn’t know from this point forward.