Sometimes in life, people need a helping hand. This is all the more evident when someone needs someone else to be a co-signee on a loan. When someone needs a helping hand with co-signing a loan, there is much to consider, particularly the risk of little to no reward for taking on an extra liability.
WORDS: CHRIS SMITH
CERTIFIED FINANCIAL PLANNER
FOUNDING PARTNER OF VISIS PRIVATE WEALTH
Every scenario is different and each person should assess their circumstances on an individual basis. For instance the loan could be for a car, business, or a home loan, each come with their own unique risks.
As a case scenario, let us consider the following situation. Amy is wanting to buy her first home, but does not have a suitable deposit for the loan, a common problem these days for first home buyers due to the rapid growth in property prices in recent times. So Amy approaches her parents Barry and Carol to help her out with co-signing the loan. Barry and Carol have two main options for co-signing, either signing as a co-borrower or signing as a guarantor. Of course Barry and Carol want to help her out, but it is a serious commitment and there is much to consider. Things such as; how secure is Amy’s income, what is her history of saving like, does she have a good credit history. These are just a few things to consider.
Why these points are important to consider is because of the risks involved. As a co-borrower, both Barry and Carol are jointly liable for the debt with Amy and could put their personal wealth at risk. If Amy is unable to pay her share of the loan, Barry and Carol will be responsible for repaying the full amount outstanding.
As a guarantor, the credit provider may not be willing to give a loan to Amy on her own and may ask for a guarantee. If Barry and Carol sign as a guarantee, they are known as the ‘guarantor’ of the loan. When you sign your name as a guarantor, you are legally responsible for paying back the entire loan if the other person cannot or will not make the repayments. Barry and Carol will also have to pay any fees, charges and interest if this was to happen. As a guarantor you do not have the right to own the property or items bought with the loan.
As part of co-signing the loan, Barry and Carol will need to tell the credit provider about any loans they are a guarantor for, when you apply for credit. They may take into account the loan repayments on other loans they have guaranteed, when they assess their ability to repay a new loan. This may stop them getting a new loan, even if Amy is having no problems making the repayments. Barry and Carol may end up with a bad credit record if Amy cannot pay back the guaranteed loan. The loan will be listed as a default or non-payment on their credit report, making it hard for you to borrow money for several years.
If you provide security, such as a mortgage on your home, to guarantee someone else’s loan, you may not be able to use your home as security for your own loan. You may even end up losing your home if you do not pay out the guaranteed loan. You may also be made bankrupt by the credit provider. Even assets you have not offered as security for a guarantee may then be sold to pay the outstanding debt.
If you are unsure as to whether you should co-sign a loan, do not make a decision which could have a seriously negative affect on your future without seeking professional advice.