To be a co-signatory to someone who has poor credit score means co-signing the loan or credit documents for your friend or relatives, which shows that you are a guarantor for the borrowed money. In case he does not pay the debt, the creditor can sue you or go after you to pay the debt.
Co-signing comes with risks hence people are nervous to sign as co-signatory. It is always advisable to stay away from being a co-signatory because you cannot vouch for the others payments. In an emergency situation if you have to co-sign there are few factors to be considered in making a decision.
Risks: The Main risk is that the primary applicant may make the payments late or not pay at all. Although the primary applicant has to make the payments, late or non-payments are recorded on your credit report, which lowers your credit score. In case the primary applicant stops paying, you will also witness the collection activity, like phone calls from the creditor etc.
sometimes you may also be sued. The creditor has no obligation that he should collect money from the primary applicant only. In case if the primary applicant stops making payments, you should be in a position to pay the bill? Otherwise, co-signing is not a good idea.
Even though the primary applicant pays on time, still you may be affected if you are planning to apply for credit for yourself in the future. This is because when you apply for credit in the future most of the lenders see how much outstanding debt you already have to decide whether to lend you or not and how much amount to give you.
The higher the debt payments, the less credit you get. Though you are, a co-signatory still lenders will include the debt you co-signed for in calculating the debt level even though you are not paying it. Sometimes, however, few lenders ignore co-signed debt if you prove to them that the primary applicant is making all the payments on time. In other words, you may not get how much you would have got if you didn’t co-sign.
Who needs a co-signer?
You will not co-sign if you know that the person who is asking you will not make the payments. However, how will you know in advance if they will pay or not? Certain aspects clearly tell us if a person can make the payments. A low credit score clearly indicates that the person may not repay the debt, but it is better to consider why he or she has a low score.
For instance, was he unable to clear his prior bills because of losing his job and now he has a well-paying job or is it that he is struggling to pay the bills due to purchasing an expensive house, luxury goods or fancy car on credit cards? A person who had problems earlier but had corrected them is less risk than someone who continues to be poor bill payer. In addition, if the person has no credit score, you cannot know about his past credit use. The only way you can consider them is how conscientious he or she is in other things such as in saving money and paying household bills before deciding to co-sign.
Co-signing comes with few risks:
Effect on the credit score: Co-signing has few risks for the co-signer. The co-signed loan shows on his credit report which impacts his buying power. Also, in the future, if he needs a car or a home loan for himself he may not get it until the car loan of co-signing is paid off. Further, he is also putting his credit rating at risk because if you fail to make the car payments, it automatically hurts his credit also apart from yours.
Consequences of Defaulting: If by chance you default on the loan for some reason or the other the lender can pursue the co-signer for collecting the money or sue him in court instead of going after the primary applicant. It is the prerogative of the lender to decide who to sue either you only or the co-signer or both of you. Since it is because of the cosigner’s credit that got you your car, it is always possible that the lender will take the co-signer to court and force him to pay, even though he doesn’t have the car.
Evaluate the pros and cons carefully before so-signing a loan agreement.