Co-signing a loan carries financial and emotional risks, experts say

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OTTAWA – Co-signing a loan can help someone access credit they might not otherwise have been able to get, but experts say it poses a risk to both your credit rating and your relationship with the person you are trying to help if things go wrong.

Niroch Kanapathypillai, an RBC financial advisor in Ottawa, says that before you decide to co-sign a loan, you should assess your own borrowing needs, as taking responsibility for the co-signing will affect your own borrowing power.

“If you are considering signing up for a five year loan, what are your plans personally, for the next five years,” he said.

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Typically, a person who co-signs a loan is a parent trying to help a child, but there can be other situations, often other family members.

When you co-sign a loan, you agree to assume the obligations of the loan if the primary borrower is unable to repay the debt. If things go wrong, it means that you will be responsible for the loan and have to pay back the money.

Kanapathypillai says that when things are going well, a co-signer can help a new borrower navigate the borrowing experience and help them build credit. Problems arise if the primary borrower cannot make the required payments.

If you do decide to co-sign a loan, Kanapathypillai says you should get your own copies of all loan statements so that you can keep track of payments without having to depend on the primary borrower and step in and make a payment as needed.

“Any missed payment on that credit item that you co-sign will have an impact on your credit,” he said.

Financial literacy and credit counselor Pamela George says if things don’t work out the damage can be devastating.

“It is very, very risky when you sign as a guarantor or when you sign a joint loan with someone, you might as well say that it is my loan, because it is really what it is”, a she declared.

George says parents looking to help a child by co-signing a loan should have a serious risk conversation beforehand, because when the going gets tough, the pressure can be both financial and emotional.

Everyone involved should understand their loan obligations.

“I would say that even when you ask someone to co-sign or be a surety, even that puts their relationship at risk,” she said.

George says she wouldn’t because of the risks to her finances and her relationship with the borrower if things go wrong.

“Those who know me well don’t even know how to come and ask because the answer would be no,” she said.


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