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Assuming responsibility for someone else's payment obligation in the event that that party defaults.
The Case for Co-Signing: When my son graduated from college, he had no credit, but needed a loan to buy a car. I co-signed his car loan. By doing this, I put my credit on the line to help him. It made sense, because I knew my son was a good risk but the lender didn't. My son established his credit-worthiness with this loan, and I never had to co-sign for him again.
Hazards of Co-Signing: The major hazard in co-signing a loan or a lease is that you may be forced to pay. You only do it for someone in whom you have a lot of confidence.
Too often, people co-sign without giving it much thought—until they find themselves being dunned for payment. Then they begin to look for ways to escape.
But there is no escape. Once you co-sign a note, there are only two ways to get off. Either the loan must be repaid in full, by the borrower or you, or the lender must agree to take you off. The lender is not going to let a co-signer off the hook when the borrower stops paying. The risk of non-payment is why the lender required a co-signer in the first place!
A lender might allow a co-signer off a note if the borrower has been making the payments faithfully for some time. But the lender
has no financial incentive to do this, and there is no way of knowing in advance how long it will take, or if it will happen at all.
A second possible hazard is that a co-signer may be handicapped in getting a loan of his own because of the contingent obligation represented by the co-signing. This is a loan qualification problem. Lenders impose limits on the amount of existing debt a borrower can carry, and the co-signing obligation is considered debt for qualification purposes.
This problem can usually be remedied if you can document that the borrower for whom you have co-signed has been making the payments on time for a reasonable period. The lender who wants to make a loan will have a reason to remove the debt from your loan application. You remain a co-signer, but the lender is ignoring your obligation to the other lender in assessing your ability to repay a new loan.