If a bank denies a loan for your friend, they have a good reason. Your friend or relative is high-risk, and the bank does not expect that person to repay the loan on time. The bank will surely run your friend’s credit.
Loans and debt are big business in today’s economy. Lenders must calculate a borrower’s risk before lending them money. If the likelihood of your friend not paying back their loan is high, the bank will require a co-signer to take responsibility for the debt. If the bank does not think your friend is a good risk, then why should you? Yet many people make the mistake of co-signing a loan for a friend or relative.
Why We Do It
The bank knows there is a high risk that the applicant will not repay their obligation, but we still want to help our friends or relatives by offering to take partial responsibility for their debt. Why would someone with good credit want to take the risk by co-signing for a friend with poor credit?
Although humans are the smartest animals, our emotions often override intelligence. We think our friend would never default on their loan because we know them. But there is a reason your friend has poor credit, and chances are, this time will not be different from the last time. Parents want to help their young child get a good start, so they co-sign for a mortgage. They do not take in to account that the child can not get the loan on their own because they can not afford the loan in the first place! Parents co-sign a car loan for their teenagers to teach them responsibility, but instead, the teenager learns to get a loan to buy something you can not afford.
If You Do Co-Sign
If you do decide to co-sign a loan for a friend or relative, you will be responsible for the debt if he defaults on the loan. The creditor will not let you know when a payment is late or the property has been repossessed, but the late payments and repossession will be on your credit report. In the case of a car loan, you will be responsible for the balance of the loan after the car is sold. The same will happen with a mortgage.
Although you want to help your friend or relative, the risk is too great for you and your financial health. Late payments and repos can really hurt your credit, and that means higher interest rates for you if you do need a loan in the future. If you want to help your friend out, you would be better off to give them a cash loan if you can afford it. If you can not afford it, do not take on the responsibility of their loan.