Bad Credit Finance

Cosigning on a loan

Family members are the first people that get asked to cosign on a loan, particularly parents who have children with no credit history or even a bad credit history, once a parent, you never seem to stop being one. With children, it’s their first credit card, or car loan or maybe their student loan – they seem to want debt almost immediately after emancipation. Cosigning is the first request made by lenders.

The question you should be asking yourself is what if the worst happens and what are my obligations? When you cosign a loan you automatically become responsible for the debt. With the majority of cosigned loans, the cosigner can be called upon at any time to make the payments, even if the person who borrowed the money hasn’t even defaulted.

On top of this, as cosigner, you are responsible for the additional charges, interest and legal fees should they have been accumulated and the loan is in default. Then to put the icing on the cake, the lender has a host of actions they can take against you that can seriously affect your own good credit standing. For example, the lender could gain a judgment against you as well as the borrower; they could also make you disclose all the assets you have in your name or even your spouses name if you live in one of the nine community property states. This could then be followed up by the forced sale of these assets to pay off the debt!

The lender will most likely inform the credit bureaus about the bad repayment of the loan, which will then affect your credit history as a cosigner and result in you paying higher interest on your own finance.

Signing as a guarantor for a loan

Confusion often reigns when it comes to the knowing the difference between cosigning for loan and signing as a guarantor. The primary difference is that a guarantor is only responsible for the loan when the primary borrower goes into default. At this point the lender can then demand the guarantor to honor their commitments, and at this point it is a guarantor is in a similar situation as those of a cosigner.

Principles to follow before assisting on a loan

If you are going to cosign or guarantee a loan, the first thing to consider how responsible the person you are signing for is and as well as how reliable they are. If you have any doubt as to their capacity to meet the repayments of the loan in a timely fashion, then it’s not worth signing.

The second consideration you need to take into account is your own financial well being, if you are unable to afford the loan yourself, then there’s no point in signing for it. Some statistics show that 75% of all cosigners are requested at some point during the term of the loan to make a payment.

Options upon default

When the loan goes into default, the lender will pursue both the primary borrower and you. They will repossess the item, sell it and demand you pay the outstanding balance. Should you know beforehand that there are going to be difficulties ahead with making the repayments, your first option is get the borrower to sell the item. Private selling will fetch a much higher price than that of what the lender will get through an auction. Pay off as much of the loan with this cash, as this should buy some time for you and the borrower to come to an arrangement about the remaining debt.

There isn’t always an item to sell e.g. for a credit card debt. In this case make a bee line to the lender and negotiate a payment plan, maybe even paying up some of the debt with your own cash and then negotiating a payment scheme on your terms. The objective here is to stop your own credit score from getting tainted.

The opportunity to assist a good friend or family member is a difficult one to deny, but one that you must face with honesty. If you are uncomfortable with the situation, say “no” and perhaps see if you can offer help in another way e.g. financial advice or budgeting assistance. Facing the awkwardness beforehand is a lot less difficult than having to face it when the loan goes into default.