To Co-Sign or Not to Co-Sign?

Has someone asked you to co-sign a loan for him or her?

Did you agree right away or did you take time to think about your answer? Do you know the rules     about co-signing a loan? Do you know how co-signing will affect your credit? Let’s look and see     what could happen.

Nick worked for a large corporation, and his position was secure. Nick liked the finer thing in life.     He had a stack of store and major credit cards. He was paying just the minimum payments on each     card. He wanted to purchase a new sports car, he was sure his credit was excellent, so he could     get the car of his dreams. Nick went to the dealership to test drive the car; the test drive was the     conformation he needed. The salesman said Nick the car is just perfect for you, lets get this deal     done. Nick said, yes! I have strong credit and I always pay my creditors on time. Nick filled out the     loan application; the salesman ran a credit report. He informed Nick he would need a co-signer.     Nick said, a co-signer, why would I need a co-signer? I have excellent credit.

The salesman explained to Nick, he had not made wise credit decisions and he had weaken his credit score, since his debt to income ratio was out of sink. If he wanted the car he would have to have a co-signer.
Nick wanted the car, but whom could he get to co-sign? He called his parents, explained he wanted to purchase a new car and he would need a co-signer. His parents said they could not help him, and they saw nothing wrong with the car he was driving. They also reminded him about the conversation they had with him on managing his credit. How he should not have applied for all the credit cards, and how it would catch up with him.

Nick called Pennie; him and Pennie had been dating for the last two years. Pennie, I found the car of my dreams, there is only one problem. I need a co-signer. Pennie said sure Nick, I will co-sign for you. You always pay your bills, you are secure in your job, and I don’t have a problem with co-signing.

Nick and Pennie went to the car dealership and found the salesman. Nick said, I am here to purchase the car and I have a co-signer. He introduces Pennie. Pennie filled out her application. The salesman approved the loan, explained to Pennie she would be liable if Nick does not pay; they would notify her of all late payments and missed payments. She would be expected to pay all balances due, if Nick did not pay. She said, she understood and it would not be a problem. Pennie had her own credit obligations. In the back of her mind she knew that if Nick missed a payment, she would not be able to pay. It would put her credit at risk, but she agreed anyway. When they left the dealership Pennie said to Nick, I cannot afford to pay if you don’t pay. Nick said, don’t worry I always pay my bills and I applied for a new position at work, so I will be making more money.

The first year Nick made all payments on time; Pennie did not worry about the loan, everything was going fine. Nick did not get the promotion; in fact he was laid off. He was struggling to keep up with all his obligations. It caused stress between Nick and Pennie. The bank was now calling her about the missed and late payments and looking for her to make the payments she could not afford.

The moral of the story, don’t co-sign unless you can afford to make the payments, you are legally responsible, you are saying I will step up to the plate if the primary borrower does not. Do you still want to co-sign?