This week, I thought that I didn’t have anything worth blogging. I didn’t see any movies, and I didn’t go out and do an activity or even have a video game to type up and discuss. I was going to pass this week like I seem to do usually, but I had an unfortunate situation to me. Something that I decided to blog about and possibly warn you or someone that you may know. The perils of co-signing a loan out.
I am not a financial expert or advisor. I am someone who is striving to live as debt-free as I possibly can. What I’m blogging about is my experience when I co-signed for a loan. I feel that there is more risk than benefits to anyone who co-signs a loan out for someone else. Everyone’s situation and reasons are going to be different, but I hope if you read this, that you know and understand what you may get yourself into if you do co-sign a loan for someone else.
It was around 2006 or 2007, someone close to me asked me to co-sign a loan with them. This individual needed to finish their last year of college and told me that they needed this loan to finish school. Still being naive to the world of financing and how credit scores and loans work, I had said yes. It was for a college loan, and I figured that the person would refinance the loan and get me off of the loan so that I wouldn’t have to be responsible for it anymore. I had in the past asked for someone to co-sign and help with my loans for school, and when I finished with college, I refinanced them off of the other person’s name.
The loan that I co-signed for was a $10,000 loan at 7.99% APR for 20 years. Today, after 11 years, the loan is only down to $9,200. There have been countless missed payments, late payments, and the loan has nearly been put into collections several times. I had to pay the loan a few times to avoid the account from going into collections. The person that I did this for hasn’t seemed to be able to hold a steady job and can barely pay on time. They didn’t even attempt, to my knowledge of even refinancing the loan out of my name. The lasting results are that I continuously feel stress and anxiety over this debt, concern if this account will wind up in collections, and my credit score is taking a 60 point drop this past week after the individual missed making a payment for two months. Co-signing for a loan was not one of the better decisions that I had made with my life.
My personal story and consequences aside, why should you never, co-sign for a loan? What are the main reasons that you should say no, even if you know that the person is responsible and will pay on time, or is also a family member needing help? One of the issues that I have is that you don’t benefit from it. You co-signing for a loan only helps the person who needs the loan. You don’t get any boost to your credit score or a pass if a person is late or misses payments. If that person misses a payment, then your credit score will drop as well as the person you co-signed with.
A co-signed loan can also affect yourself trying to get a loan. That debt that you co-sign adds to your debt to income ratio. It’s a method that lets lenders know how much you make against what you owe in debt. So say you make $1,000 income a month. Now, let’s say that you have a current loan repayment of $250 a month. You have a debt to income ratio of 25%. Now let’s say you co-signed a loan for someone for $150 a month. That $150 gets factored into not only the person you co-signed to loan for, but for you as well. So now your debt to income ratio is 40%. As that increases, you are starting to get what is considered a high debt to income ratio. Where lenders will begin to look at you as a high risk for lending you money, due to looking like you have too much debt. A higher debt to income ratio can impair your ability to get a loan if you need one and be denied, and can also lead to higher interest rates instead of a lower rate if you have good credit.
The worst part about doing this is that it more or less is that a co-signed loan can become your debt if the person you co-signed for doesn’t pay it back. If you co-sign with someone, and they have the misfortune of getting sick, unable to work anymore and get an income, or even pass away, the debt becomes your responsibility. There could be a saving grace or hope say, you co-sign for a car or a house, and you can overtake and get said items. But what if you co-signed for just a regular loan, with no collateral. Something for somebody to pay off school, or even for them to lower their higher interest debts. You have to come up with that owed money. You are just saying when you sign for the loan, “I’m good also to pay you back in the event the person I am co-signing with can’t pay you back.” Yes, a person could be trustworthy, reliable, and responsible, and you know them well or could be family member or friend in a bit of distress. But what if they miss a payment, or slack off, and just doesn’t care or want to pay anymore. You need to pay the debt off. Otherwise, you are responsible and accountable for the loan as they are.
So why did I do this? As I said, I didn’t know any better. Had I known now what I did then, I would have said no. Co-signing was a mistake I now realize that I had done. I know that everyone’s situation can be different. Maybe there is a loved one that needs this money. I’m not telling anyone not to do this if you wish to help someone out. This blog post is to serve as a warning if someone approaches you, asking for help with a loan. I feel that I haven’t benefited from doing this and now think that I have to check-in going forward that the person will make payments until the loan is gradually going to be paid off. If you are presented with a situation to co-sign with someone you know, it can prove to be a very costly mistake for you in the long run.
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