Why Co-Signing Is NEVER a Good Idea and How To Get Out Of It
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Has a family member or friend ever asked you to co-sign for them and you either considered saying yes or actually said yes and went through with it? Well if you are considering co-signing for someone, I'm going to tell you why you should NEVER co-sign for anyone and teach you some easy and creative ways to say "NO". Now, don’t be discouraged, if you said yes and went through with it, I'm going to tell you how you can get your name off someone else's loan and why you should NEVER do it again.
What Is a Co-Signer?
First things first, what the heck is a co-signer? Some people think co-signing is the same as serving as a character reference, telling the bank that this person can be trusted. THIS IS NOT TRUE! A co-signer is a person, usually with good credit, who agrees to pay a primary borrower's debt if they default on a loan. A co-signer is normally needed in order for a person with poor credit history to be approved for a loan.
For example: James has poor credit and wants to buy a car, but the bank said "Nope, we wont extend financing to you because you haven't been paying your bills on time and you actually never paid back your last car note from another lender. However, we will extend financing to you if you can get a co-signer with excellent credit." Now here comes you with your excellent credit. James asks you to co-sign for him because he really wants this new car. You say yes, now that makes you equally responsible for the car note. Clarissa, what does that mean? Well, let me tell you what it doesn't mean. It doesn't meant that you have legal rights to the vehicle, remember, the car is not yours, you are just responsible for paying for it if James doesn't.
Why You Should NEVER Co-Sign For Anyone
Let's go back to the James scenario. Let's say James loses his job or he gets other bills and can’t keep up with the car note. Here's what happens to you as a co-signer and here are the reasons why you should never co-sign in the first place:
The lender can demand that you pay the loan in its entirety
They can sue you
They can garnish your wages
They can garnish your bank accounts
Your credit score will be negatively impacted and will reflect that you missed a payment
It impacts your debt to income ratio
Now imagine paying all your own bills on time and having a good credit history, then this happens and now you have to pay another car note on top of your own. I'm pretty sure if you could have 2 cars you would have, however now you are forced to pay for a second one.
You can let them repossess the car so you wont have to pay the monthly payments, but that will also reflect negatively on your credit report and impact your credit score. Also, getting the car repossessed does not mean that you do not have to pay anything. When they repossess a car, they sale it at an auction to try and cover the cost of the loan. Since cars depreciate, the amount they get for the car is not the same amount they lent to you, this causes a deficiency. The co-signer would be responsible for that deficiency, so its not a get out of jail free card.
One thing people also fail to realize is that even if the person pays on time and never misses a payment, it impacts your debt-to-income ratio. Debt-to-income ratio is a percentage lenders use to measure your ability to pay all your monthly obligations you've borrowed. It is the sum of all your monthly debt payments divide by your gross monthly income. If you go and try to get a loan of your own, this is what lenders will review to determine if they should lend you more money. So see, even if your friend or family member intends to pay every cent back on time, this can still negatively impact you.
Why People Co-Sign
If you ever co-signed for a person, you can answer this yourself [insert your reason here], but I can guarantee that your reason reflects one of the reasons below:
To help a friend or family member
Because you didn't know how to say "NO"
As you can see, the benefits do not outweigh the risks you take on when you decide to co-sign. Think about it, are these good enough reasons to ruin your credit? I don't think so. Now I know you are thinking it, but I like to help my friends and family as well, but things happen, life happens. When situations like James' come along most people do not default their loan to hurt you however, it does hurt you when they can't pay. If you want to help a loved one, you can help them with the down payment, you can take them to work, or you can let them borrow your car when they need to, but DON'T co-sign.
How To Say No
Many people say yes when they really want to say "NO". This behavior can not only get you in a lot of trouble, but can put you in situations that make you feel uncomfortable. Learning how to say "NO" is an important adult lesson that everyone needs to learn. Here's some ways you can say "NO" when someone asks you to co-sign a loan for them:
Use the actual word
Many people use phrases like, "Let me think about it", "Maybe next time", "I'm not sure", or "Maybe". This is where they mess up, just use the word "NO". People tend to respect you more when you are upfront and honest about your feelings and it makes them feel like they can trust you. Just say "NO".
Be honest as to why you're saying "NO" by using the word "because"
You should start getting into the habit of NOT explaining yourself. However, until you get there you can provide them with one reason why you do not want to or can't co-sign. Using the word because greatly increases the chances of someone agreeing with you. For example you can say: "Im sorry, I can't because I'll be buying a house soon" or "I can't because it will significantly increase my debt to income ratio and lower my credit score".
I caution you to be careful with this one though because, it will give the person the ability to counter you with a solution to your reasoning just to try to get you to do it until you run out of excuses not to do it. This is why I say you shouldn’t give a reason, but I know that is difficult for some people to do. If they can find solutions for your problems for not loaning them the money, they can come up with solutions to find the money from somewhere else.
If they start offering solutions to my problems, I’d say, “that’s actually not a bad idea, it sounds like you’re good at solving complex problems. Let’s see how we can figure out other options for you.” That usually shut them up. Or you can use one of their excuses in a way where it’s not clearly identifiable that it’s the same excuse. Once they solve it, give that to them as a solution. They’ll likely come up with another excuse, but at that point, they have a solution, let them figure it out.
Don't elaborate
Once you say "NO" and give your because statement, leave it at that. Most people, when they feel uncomfortable they continue to talk. So what could have become just one easy sentence, you now have a whole story as to why you can't. Don't do that, it's not fair to you to drag it out and it's not fair to them to have to listen to you go on and on as to why you won't help them.
How To Remove Your Name From A Loan You Co-Signed
Let's say you already co-signed for someone. After reading this you're like How the heck do I get out this thing? There's only 2 ways to remove yourself as a co-signer.
Pay off the loan
If you find yourself in a situation where the person isn't paying, you can pay the loan off in full yourself or request that they do it, this is option number one. You’re probably laughing right now because that sounds kind of silly. If the person isn't paying the monthly payment, there is no chance that they will be willing or even able to pay the loan off in full and what are the chances that you have that amount of money lying around to pay off the debt in full.
Have the primary borrower refinance
Option number two is to have them refinance with a loan in only their name. This option may be more likely however, if the person couldn't get the loan without a co-signer, then refinancing with their name only will just put them back in the same position they were when they asked you to co-sign. You can ask them to get someone else to co-sign for the refinance loan, but let them know that you can no longer be responsible for their debt. This is easier when they are making their payments on time, so try to position this to them before they default on the loan.
Final Thought
If a person needs a co-signer it's because the bank thinks they are an at-risk borrower. If the bank is telling them "NO", than you should as well. Those risk outweigh the reward and can change your life and finances in the blink of an eye. Don't let someone else impact your credit in a negative way. You can do all bad by yourself.
