Many believe that to co-sign a promissory note for a loan or a mortgage is easy and simple for a co-signer simply signs on the doted line for signer’s signature without knowing his/her obligations as a co-signer.
A question to ask is why a bank or any lender needs a co-signer? A simple answer is because an applicant for a loan does not meet the credit requirement of a lender. These requirements are what we usually call the Three Cs of Credit: Capacity to pay, Credit rating, and Collateral.
Meaning, if an applicant does not meet the above requirements, there is a risk that he/she defaults payments down the road. Should it happen a lender would suffer a loss.
To prevent a possible loss, a lender requires a co-signer with good income and good credit. Why? Because in the event the principal borrower (applicant) defaults his/her payments, a lender runs after the co-signer.
Example: Mr. A the principal borrower for a $20,000.00 loan, and Mr. X co-signed for the loan. After few months Mr. A defaulted his payments. Then, the bank runs after Mr. X to pay for the unpaid amount. Should Mr. X is unable to pay, the bank can initiate legal action against both Mr. A and Mr. X, for they are jointly and severally liable.
Should a court judgment is rendered against Mr. A and Mr. X, garnishment of Mr. A. and Mr. X’s wages to follow.
Moreover, should Mr. A files bankruptcy or has no capacity to pay the judgment amount , Mr. X would be fully responsible to pay for the balance of the loan plus interest and cost that include legal fees.
Many co-signers whose wages were garnished and ruin their credit ratings because principal borrowers defaulted on their payments. Should it happens to you, as a co-singer, your credit rating would be adversely affected and it would reflect in your credit file in the Credit Bureau up to seven years.
Furthermore, even if a principal borrower pays his/her loan regularly, as co-signer your capacity to borrow would be limited. That is you may not be able to get a loan for yourself when you need it, for the amount you co-signed for, is considered your personal debt. Financial institutions are aware of it for it would be reflected in your Credit Bureau’s record.
Example: Base on your income and credit rating you can borrow up to $25,000.00 unsecure loan. However, if you co-signed for someone for an amount of $20,000.00,
when you apply for an unsecure loan for yourself, you can borrow only up to $5,000.00 for the amount of $20,000.00 you co-signed is considered your own person debt.
Knowing the obligations and effects to your own credit rating as a co-signer, you should think twice before you agree to become a co-signer.