by Gene Frendo
A bank will often require that a person who does not qualify for a credit application on their own find someone to co-sign or guarantee the debt in order to obtain credit. A parent may be asked to co-sign a car loan or perhaps an apartment lease for a child just starting out and who has little or no credit history to obtain the financing on their own.
A person new to Canada may reach out to family or friends to co-sign a loan to help them establish a credit history. Finally, a person may simply have a poor credit score because of a history of missed payments, outstanding debt, or perhaps a previous bankruptcy and may have no other way to obtain credit beyond a secured or pre-paid credit card. The question then becomes: When is it a good idea to co-sign a debt, and when is it not?
The answer to that question lies in the individual circumstances of each specific situation and the relationship between the parties. Generally speaking, people are not qualified to determine if a person they are co-signing for can, or will, pay it back. In addition, it can often be difficult to say “no” to someone who approaches you to be a co-signer due to the personal relationship between you – particularly between spouses or common-law partners. Regardless of the circumstances, however, the bottom line is that if you are willing to co-sign a debt for someone you also must be willing and able to pay it.
Remember, there is a reason why a financial institution is asking for a co-signer. Banks know their business and they know risk. If they’re not willing to take that risk with all the financial resources available to them, the question then becomes: are you in a position to take on that financial risk should the person you are co-signing for be unable to repay the debt, or worse, defaults on it entirely? Ultimately, your credit file can be affected by a co-signed loan gone bad and thus, co-signing a loan could very well affect your financial future. Controlling your financial future means not giving up that control to someone else. By co-signing a debt forsomeone else, you may be doing just that.
Gene Frendo is a Licensed Insolvency with Frendo and Partners with over 20 years of experience helping people resolve their debt problems.