Think really hard before you co-sign a loan

Aneth Ng-Lim

Posted at Sep 19 2022 05:11 PM | Updated as of Sep 19 2022 05:57 PM

If you’ve managed people at work or in your own business, you must have heard many reasons (or excuses) why they have to go on leave. I’ve heard it all – from cars that break down, or a family member needing to be brought to the doctor, or water service interruption so they can’t shower and come to work.

But there was one time that the excuse was a bit unusual: she had to go to court to testify against a buyer who defaulted on car payments. Because I knew she only had one car and she brought it to work that day, I had to ask which car was this. Turns out that staff co-signed a car loan as a favor to a relative, and thanks to a series of unfortunate events, got herself entangled in a legal mess.

While I didn’t have all the details, one thing was clear: she regretted saying yes and got herself stuck in a situation where there is no easy way out.

What does it mean to be a co-signer?

People take out loans from the bank or from their employers. I’ve had to do this a few times and remember both my bank and my employer requiring me to find a co-signer. Why? Because having a co-signer limits the risk they carry when they hand out a loan.

Together with the primary borrower, a co-signer takes responsibility for paying back a loan. This means, if you agree to be a co-signer, if the original borrower is unable to pay, you are obligated to settle any payments he or she missed, and even the full amount of the unpaid loan.

Who can be a co-signer?

Most of the time, a co-signer is a family member. When I took out my first car loan, I was still single so I had to ask my sister to co-sign it with me. By the time I applied for a housing loan, I was married so my husband was my co-signer.

However, co-signers are not limited to relatives. Friends and significant others can also become a co-borrower. So if you have a family member asking you to co-sign a loan, and pleading that you are their last hope, even if you are his or her only living and qualified relative, technically, you can say no.

The one extending the loan will set the requirements for a co-signer, and I have yet to come across one that requires familial ties. They do prefer for a co-signer to also be working or have a steady source of income (because that’s the whole point – one more party that can pay off the loan). Age is also a factor, as they want a co-signor that will continue to have a salary throughout the tenure of the loan. This means if the loan is for 10 years, the co-signer cannot be older than 50 years old.

How many can be co-signers?

Just one is usually needed, and that’s scary enough. If a loan requires more than one co-signer, you need to go through the fine print and find out why. Maybe the loan amount is significant? Or the primary borrower is considered high risk? Ask these questions before you sign on the dotted line.

When a friend took out a car loan and needed a co-signer, his parents were both willing. However the bank only wanted one and so the honor went to his mother, who was younger and had no other outstanding loans.

You’re not just providing character reference

As co-signer, you are legally binding yourself to pay for the loan in the event the primary borrower cannot. So do not make the mistake that you are simply providing a character reference for the borrower. You are not just saying that your relative or friend can pay for the loan; as co-signer you are also promising to do it in case he or she is unable to.

If your relative or friend is misleading you in saying that as co-signer you have no legal obligation, that’s a red flag for you to run in the other direction. And even if your relative or friend has the capacity to pay the loan, think really hard if you want to be a party to this. Fortunes can change overnight, and you don’t want to be left holding the bag, or loan papers in this case.

Can you remove yourself as co-signer?

If you’re reading this and is already a co-signer with a loan, and panicking, I’m sorry to tell you that it’s not easy to remove yourself from this sticky situation. As long as the loan is in force, you remain the co-signer. To be removed, the loan will need to be refinanced, and that can be costly for your relative or friend. 

As someone who benefitted from having a co-signer, not just once, but twice, I am not advising people to say no. Just know what it is you are getting into. You could end up paying the loan, or get sued, or end up with bad credit record. But if you are confident that these won’t happen, or that even if they do, you will be ready, then sign away. You owe it to your wallet to always make informed decisions.

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