It’s very common for younger people or individuals with little credit, to need a co-signer on their first loan. Usually lenders want to see a borrower with credit history showing they have experience managing a loan and proof of income. If the borrower lacks either of those two requirements, they must find someone to co-sign on the loan.
Many people are unaware of the danger that comes with co-signing on a loan or lease. When relatives and close friends need help with a loan, it can pull at people’s heartstrings. If you’re going to co-sign, it’s so important that you understand the risks so you can protect your own credit and finances.
A co-signer is guaranteeing that if the primary holder cannot make payment on the debts, they’ll be responsible to the remainder of the loan. Any defaults, missed payments, or negative information will go to both the primary and co-signers credit and have a devastating effect on credit and finances.
Co-signing is a dangerous process since the co-signers’ credit reports and scores will reflect the payment history made by the primary. This is why you should only co-sign for accounts that you’re responsible for. If his son lost his job and could not pay for the automobile the repossession would be posted on Harry’s credit and he would be financially responsible to the lender for whatever balance was owed. Besides the credit damage there is also the financial burden of having more of a debt load. Since banks look at income to debt ratios and co-signing is a full legal commitment it will be added to the income-to-debt ratio. This could impact future loan approvals or the amount of loan money extended. In addition, failed co-signed loans can cause a lot of resentment and ruin relationships between people.
Please feel free to share this valuable information with any clients who may be unaware.