By Jasmine Brown

BDO Debt Solutions

Co-Signers Beware

Jul 28, 2023 | 10:08 AM

“The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of Pattison Media and this site.”

Recently, a colleague of mine posted a statement on our social media site that said, “Never co-sign for any debt if you are not prepared to pay 100% of that debt.” The statement got me thinking that many people do not understand the implications of co-signing a debt for a friend or family member or the risk involved in doing so.

What does it mean to co-sign a loan?

It is not uncommon for a friend or family member to co-sign a loan in order to assist someone in getting credit. Many people even get an emotional payoff for co-signing a loan, because it makes them feel good to help out. However, it is important to know that when you co-sign a loan, you are agreeing to pay the debt in full in the event that the primary borrower defaults on payment. It is different that being a joint borrower, because you are not applying to use the credit yourself.

Why would a lender require a co-signer?

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The lender may require a co-signer for any of the following reasons:

· they are not confident in the primary borrower’s ability to pay off the loan;

· the primary borrower’s credit score is not strong enough that they can qualify for the loan on their own;

· the primary borrower may have a very limited credit history, or no established credit;

· the primary borrower may not have the sufficiency or stability of income to meet the requirements.

What is the risk of co-signing a loan?

Some of the risks involved in co-signing a loan are as follows:

· you are obligated to make any missed or late payments;

· your own debt/income ratio may be affected in such a way that you are unable to obtain credit on your own because the co-signed loan already appears on your credit report;

· you are jointly and severally liable for the full amount of the debt, so if the primary borrower files a bankruptcy or consumer proposal, some of the debt may be paid through that process, but you are still responsible for the rest of the debt;

· you may become unable to manage your own debt repayment, bills and expenses with the additional payment;

· it may damage your own credit score.

Should I ask a family member to co-sign a loan for me?

When you ask a friend or family member to co-sign for you, you could be putting your relationship at risk. If you default on payments, and your friend or family member becomes responsible for paying off the loan, it can create hard feelings. Before asking for a co-signer, imagine yourself having a conversation with that friend or family member, advising them that you are unable to pay the loan on your own, and that they are now fully responsible for payment. If you don’t want to have that conversation, avoid asking for a co-signer. At the very least, advise your friend or family member of the implications and suggest that they do their own research before agreeing to co-sign.

If you are in a position where your lender is requiring a co-signer, you should always consider the reason why you don’t qualify for the loan on your own. Take a look at whether it is in your best financial interest to be borrowing in the first place, before you consider asking a co-signer to take on your risk.

If you are considering co-signing for someone, the best thing you can do is to heed the advice of my colleague, and not co-sign a debt for someone if you are not prepared to pay 100% of that debt.

If you are having trouble making ends meet each month, finding the right debt solution can help. Visit the BDO Debt Solutions website for more information about bankruptcy, or call 1 855 BDO DEBT to book a free, no obligation consultation.

Jasmin Brown is a Senior Vice President overseeing the insolvency practice in Saskatchewan. She is committed to providing creative and practical debt solutions with empathy, understanding and professionalism to help people overcome their financial difficulties.