Alison on Money
Keep that credit intact while co-signing a loan for your children
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Spring is a time of optimism as students graduate and venture out into the world of work.
It’s also the season when young’uns may need cars, clothes, travel funds and furniture as they spread their adult wings. And to acquire all that stuff, they often need a co-signer because they can’t yet qualify for loans on their own.
Here are seven things to keep in mind if you are asked to guarantee a loan.
1. Lenders consider co-signers joint borrowers who are equally responsible for the amount owing.
2. The loan will likely will appear on your credit report and may adversely affect your credit score, especially if payments aren’t made on time. Debt collectors could pursue you if the loan is in arrears.
3. Since co-signers are legally responsible for the loan, monitor it closely. Happily, if you co-sign with a federally regulated financial institution, you are entitled to receive the same information as the person who takes out the loan.
4. Before you become a co-signer consider the worst-case scenario. Can you afford the loss? Even if there is an asset involved, like a car, it may be worth less than the amount owing.
5. Aside from the money what would it do to your relationship with the primary borrower if there were problems with the loan? Co-signing is the same as lending money and should be treated as such.
6. If you are co-signing for a family member other than your child or for a child who has been away from home for some time, ask for a credit report. This can create tension, but if they have trouble paying off debts, how is that going to be different with you as a co-signer?
7. When the loan has been repaid, get a statement from the lender that the debt has been discharged and check your credit report to ensure it is noted.
Most experts will advise against co-signing, but we as parents always want to help our kids. Still, make sure you are aware of the consequences when you are responsible for someone else’s debt.
Do your homework. Visit the Financial Consumer Agency of Canada at fcac-acfc.gc.ca. Click on ‘Resources’ and go to publications. There you’ll find a useful tip sheet called “Know your responsibilities as a joint borrower.”
Alison Griffiths is the author of Count on Yourself: Take Charge of Your Money. Reach her at alisongriffiths.ca or at email@example.com