When your credit score is sitting high in the Fico range then your own financial standing is good enough to endorse a loan for someone else. You may well find yourself approached by a family member or friend who needs a loan for some matter, but is unable to get the necessary approval to proceed. The financial institution involved has provided the solution. If someone else will co-sign the loan and act as their guarantor the funds will be forthcoming. You could find yourself being the person asked to stand in as guarantor.
Don’t be flattered by such a request and immediately accept, even if they have a good reason for needing the loan. Firstly you must put the consequences to yourself above their needs and reasons, and understand the full implications of endorsing a loan. There is probably a good reason why the person who needs the loan could not obtain one and considers the person a bad risk. Do you have better judgement than the bank?
When you endorse a loan the debt becomes yours. In some cases the person you are standing guarantor for will pay the loan in a timely fashion and you need never lose any sleep over it, but the statistics are not in your favour of this happening, as over 75% of endorsed loans become the responsibility of the co-signer.
So considering the facts and then the worst case scenario, you should know that as soon as you co-sign your own available credit becomes reduced as the amount of the loan is considered a potential debt of yours. If the other person misses a payment you will not be advised by the lender until they choose to contact you to recover the missed payment, by which time your own credit score will have gone down. A missed payment can come as a surprise to you even if there have been instances of tardy payments before.
The responsibility is equally yours to ensure that the loan is repaid, and the lender is quite within his rights to pursue you. Most probably you are an easier target to pursue than the person you signed for and the bulk of collections activity will focus on you. If the other person refuses to pay or is simply disinterested or has disappeared, you are now responsible for repaying the rest of the loan. Any paperwork which was signed to release you from future responsibility for the loan after an agreed amount of payments, typically 36 on a student loan, is voided.
Once you understand the full implications of becoming a co-signer then you can consider the reasons to endorse the loan, but don’t be persuaded against your better judgement. The simplest way to make a rational determination is to ask yourself if you would be willing to gift the amount of the loan to the other person. If you would then it is a clear cut decision that you can endorse the loan which they will assume responsibility for.
Of course the crucial question is could you afford to pay the loan if necessary or would the monthly payments be too much if it came to that. If the answer is no then it really isn’t wise to sign. Such a loan would most likely be unsecured so you aren’t putting any assets on the line, but you would still be pursued by the normal collections route which could involve bailiffs or garnishee orders against your bank account.
The best reason to endorse a loan is to do so for your own child who has not had chance to establish their own credit history yet but needs parental help, typically for a student loan. In such an instance you may consider looking at taking a loan in your own name through the federal PLUS scheme as the costs will be lower than a private loan. The loan would remain in your name but so would a defaulted loan.
It is a very personal decision whether to endorse a loan for someone else and unless you are rich and can afford to repay the loan yourself it isn’t to be recommended. There may be other ways to help out the third party who needs the loan without assuming such a responsibility. Deciding to endorse a loan for a child could well be determined by if you’ve brought them up to be financially responsible. Don’t be pressured into endorsing a loan against your better judgement, but if you feel happy to help and can carry the possible loss it may be thing for you.