You are not protected if the co-signing individual defaults on the loan. Here's how you can take percautions to keep them on-track.
When we love someone, it’s all too often hard to say no to a request to co-sign on a loan. This is particularly true for those in romantic relationships or parents of children just starting off on their educational or career paths. But here’s the harsh reality, you can’t cover yourself if something goes wrong.
Unless and until your loved one is acceptable to the bank as a borrower without co-signers, or the institution will remove you as a co-signer, there is nothing you can do. Nothing, that is, except work to keep your loved one on the straight and narrow when it comes to paying back that debt.
Let’s take a look at a student who is just starting his studies, and asks his parents to co-sign on a student line of credit. This scenario can go terribly wrong – here’s a great example. Ultimately, you’ve signed saying that this loan will be your responsibility too.
As this student debt builds (if it does), you – as a co-signer - could lose your own borrowing power, due to the fact that these co-signed loans often show up as your loans on your credit.
With this in mind, here are a few things you can do to stay on track of the situation…
1. Go online and pay for your credit score (not your report) and see if the loan which you co-signed on shows up on your credit bureau.
2. Request online access to the loan itself so that you can monitor its use and payments.
3. In the case of co-signing on student debt for a child, find other ways to help your child fund his schooling going forward; this might include government student loans, bursaries, scholarships, part-time work, etc.
Require that the indebted individual make payments to you now. You can tuck it aside, ensure it goes towards debt repayment, and when the time comes again for that individual to borrow from the bank, you might just be able to avoid the co-signing role.
Ultimately, if the choices and efforts of the indebted individual don’t have consequences, no financial maturity will be gained…and financial disaster could even result.