Consider these situations: Your son needs a loan to continue his studies, but the bank won’t lend him the money because he’s too young and has no credit history. Your best friend, who’s just been through a divorce, needs a loan to buy a car to travel to her new job. The bank won’t agree to a loan because of her low credit rating. In each case, you’re asked to be the co-borrower of the loan because you are creditworthy and are known for your kindness and generosity. What would you do? Would you blindly sign the loan?
As you can see from these examples, parents often co-sign their child’s loan application, but a spouse, friend or someone else can also be a co-borrower.
What’s the difference between co-signing and endorsing?
Before looking at the risks of being a co-borrower, let’s first look at the difference between an endorser and a co-borrower. An endorser becomes responsible for the debt only if the borrower defaults. However, most institutions prefer a contract between two co-borrowers. Each has the same rights and responsibilities.
Get the facts before you sign!
Before agreeing to co-sign a loan, it’s important to understand what your responsibilities will be, as they could have serious consequences.
Impact on your credit record
As a co-borrower, you are fully responsible for the debt.
- If the other borrower defaults on the payments, you must repay the loan on your own. This will clearly impact your finances. Would you be able to take on this additional debt?
- If the other borrower’s payments are late, this will be reported in your credit record and could reduce your credit rating. Make sure the financial institution has your updated contact information. That way, they can quickly notify you of the late payment so you can remedy the situation before it affects your credit too much.
Impact on your borrowing capacity
Co-signing a loan is the same as if you applied for the loan in your name only. As you get closer to your credit limit, your ability to borrow decreases. If you ever need to apply for a loan right after becoming a co-borrower, you may be denied. So, it’s important to think about your own plans before agreeing to co-sign.
Impact on your relationship with the co-borrower
You trusted your friend, which is why you agreed to co-sign the loan. But for some reason you don’t understand, the friend has defaulted and is refusing to make payments. Unfortunately, this pessimistic scenario does happen. Needless to say, it could end your friendship.
If you’re looking for a co-borrower
First, consider all your options: do you really need to borrow for your project or could you simply set funds aside for a few months?
If you don’t have a credit history yet because you’re too young, or if you absolutely need a loan, finding a co-signer will allow you to borrow a larger amount and get a good credit rating. Ask someone you trust and who is financially sound to help you. Of course, a family member or your best friend is often a good choice. In any event, discuss the terms of the loan together and make sure you make your payments regularly. If you don’t keep up your payments, your co-signer will have to pay for you.
In the event of a separation or divorce
If you’ve co-signed a loan with your spouse, your obligations don’t end in the event of a separation or divorce. As co-signers, you will both continue to be liable for the debt.
Can’t get a loan because of your debts? Contact one of our financial recovery counsellors.
