A reader is faced with something many of us have encountered: risking our credit to help out a loved one. Is it ever OK?
This week’s question concerns something we know we shouldn’t do, but often do anyway. Namely, stick our financial necks out for those we love.
I have a question. I have a new college freshman and he is already signing up for an apartment for next year.
He is asking me to co-sign the lease as a guarantor. I’m hesitant not knowing exactly how this will affect my credit and my short-term plans to potentially refinance my mortgage.
Do I have to co-sign, as in will he not get housing if I don’t? I don’t know his roommates’ families. How do I know they are also co-signing and I’m not on the hook for the whole rent at some point? Will this hurt my short term credit? Thanks for any information.
Here’s a video I did last year about co-signing car loans. It’s obviously not the same as co-signing a lease, but many of the same principles apply.
Co-signing for someone simply means that if they fail to live up to their obligations, you’ll be expected to. Whatever the reason — in some situations, even death — if that person fails to pay, it becomes your responsibility.
Now, let’s look at co-signing in general and Sigrun’s situation in particular.
When’s a good time to co-sign? Never
Virtually by definition, co-signers come into play for only one reason: The person taking out the loan (or in this case a lease) has a problem with his or her credit. The problem may be bad credit or insufficient credit history. Either way, the lender or landlord — despite the fact they stand to make money — has decided the applicant isn’t a good risk.
Here’s another way of looking at it: A company that’s in the business of taking risks with money has decided this person is too risky to deal with. In their experience, which is probably vast, entering into agreements with people fitting this profile often results in lost money.
As the co-signer, you’re betting against these professionals. You’re saying they’re wrong about this person, and you’re willing to bet both your money and your good credit to prove it.
You have no upside, except perhaps keeping a friend or family member happy. You have a huge downside. Sound like a good bet to you?
Protecting yourself when you do it anyway
Six years ago, I co-signed a car lease for my girlfriend, now my wife. Why did I do what I knew was stupid? The same reason anyone does — to be a nice guy and help someone I care about and trust.
From lending money to letting someone borrow your car or stay at your house, most of us have assumed unnecessary risk to help other people. But if you’re going to do something like co-sign a lease or loan, at least take what precautions you can.
- Are there alternatives? Not only would my parents not have considered co-signing a lease for 18-year-old Stacy, they wouldn’t have allowed him to stay in an apartment during his sophomore year in college. Nor, for that matter, would the college. Freshmen and sophomores were required to live on campus. If I’d insisted on it when I was that age, my parents would have simply required me to foot the entire bill for the apartment and the education.
- Realize this might eventually bite you in the butt. Like they say, expect the best, but prepare for the worst. Will it devastate you financially if this transaction goes south? If the answer is yes, reconsider. And remember, if things do go south, you knew the risks, so you’ve only yourself to blame.
- Ask questions. Sigrun asks, “I don’t know his roommates’ families. How do I know they are also co-signing and I’m not on the hook for the whole rent at some point?” This is an excellent question, and I’d want it answered before moving forward. I’d also want to make sure all tenants are equally liable for the lease, as well as the utilities. Almost everyone who’s rented a college apartment with friends has been shafted with rent, utilities or both. It’s not just likely that someone’s going to leave that lease early, it’s guaranteed. Don’t ever enter into any group-living situation unless all are equally on the hook for rent, utilities and all related deposits.
- You’re on the hook. Act like it. If you’re co-signing a lease, you’ve got to have a system in place so you’ll know if rent is late. Sigrun’s son will be motivated not to mention problems. Sigrun’s interests are the opposite. He needs to know the instant something’s going wrong.
The only good news: As long as rent is paid, it won’t affect your credit
Because rent payments generally aren’t reported to credit reporting agencies, simply co-signing a lease won’t appear on your credit history. This is not true of other types of credit, like car loans and credit cards. They’ll show up, and potentially have an effect on your credit score, either positive or negative.
However, if a lack of timely payments results in a collection or judgment, expect both a lawsuit and serious damage to your credit.
Good luck, Sigrun!
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