Co-signing a loan? Recognize the risks first

Borrowers who are unable to repay loans sour relationships, cause problems for co-signers

PITTSBURGH— Time and time again, staff members at Advantage Credit Counseling in Pittsburgh have seen parents and grandparents suffer the consequences of financial ruin all because they co-signed a loan for a child or grandchild who either could not pay back the debt or simply refused to.

“If the primary borrower defaults on payments, it reflects negatively on the co-signer,” said Heather Murray, manager of education at Advantage Credit Counseling.

“If the primary borrower can’t pay the loan, the co-signer is responsible for taking on the debt.”

Friends and family members who co-sign loans to help someone they care about may find out the hard way that taking responsibility for someone else’s debt not only risks damaging a relationship, but also their own financial health.

The chances of co-signers losing money or suffering a spoiled relationship are high, according to a recent report by Texas-based CreditCards.com.

The company found 38 per cent of co-signers had to pay some or all of the bill because the primary borrower did not; 28 per cent experienced a drop in their credit score because the other person paid late or not at all; and 26 per cent said the experience created bad blood in their relationship with the person they co-signed for.

The survey, conducted by Princeton Survey Research Associates In- ternational on behalf of CreditCards.com, reported about one in six U.S. adults have co-signed a loan or credit card for someone else.

Auto loans accounted for 51 per cent of all co-signing.

Lynnette Khalfani Cox, founder of AskTheMoneyCoach.com based in Mountainside, N.J., said every study she has seen on the topic confirms that more often than not, giving family members or friends loans or cosigning for other people’s debt is a bad idea.

“If someone has to come to you for a loan or in need of a co-signer, chances are the person already has, at best, thin or no credit, and at worst, bad credit,” Cox said.

She considers it admirable that people — out of love, sympathy or concern for someone else’s plight — want to help out.

But, she said, that doesn’t make it a smart financial move.

She typically urges people not to do it.

“This isn’t a hard and fast rule, of course,” Cox said.

There are certain times when it may be just fine to help out someone by co-signing.

But both people should understand the terms and should recognize the risk to their relationship if things don’t go as anticipated.

“For some people, they may decide that it’s just not worth it to risk a valued relationship.”

“Chances are, the person already has, at best, thin or no credit, and at worst, bad credit.” LYNNETTE KHALFANI COX FOUNDER OF ASKTHEMONEYCOACH.COM