Agreeing to co-signing loans for a family member or friend in need might seem like an easy way to help them access financing that otherwise may get denied. However, entering into a co-signing loan obligation carries substantial risk and should not get taken lightly. This guide examines the pros and cons of serving as a Canadian loan co-signer.
How Co-Signing Loans Work
In a co-signing loans arrangement, two parties agree to serve as borrowers and share responsibility for repayment. The primary borrower receives the loan funds directly but might not qualify independently due to issues like low income, poor credit history, or high debt ratios. The co-signer has no intention of directly using the funds from the co-signing loans but serves as a guarantor by pledging their income, assets, and credit record to help secure approval and better loan terms. Both borrowers’ names appear on the loan agreement. Lenders can seek repayment from either party in the event of default. For more insights on the pros and cons of co-signing in Canada, check out Loans Canada’s article on the topic.
Potential Benefits of Co-Signing Loans
Helping out a loved one by co-signing a loan they otherwise couldn’t access provides some rewards like:
- Strengthening personal relationships through generosity
- Improving a primary borrower’s credit standing over time by enabling responsible usage and repayment of credit
- Earning favor that the primary borrower may repay through future reciprocity
- Potentially claiming tax deductions on interest repaid for certain co-signed loan types
However, substantial risks exist as well.
Key Dangers of Co-Signing Loans
Before agreeing to co-sign, consider scenarios like:
- The primary borrower fails to repay any of the loan balance leading the lender to seek payment from you instead
- Your own credit scores get damaged by late payments or collections on the co-signed debt
- Collection actions get taken against you like wage garnishment or asset seizure if you cannot cover the payments
- Legal action becomes necessary to attempt recovering losses from the non-paying primary borrower
- Relationships become permanently damaged if the co-signed loan goes sideways
Any of these situations can arise even with the best intentions at the outset.
Ask Plenty of Questions Upfront
If considering co-signing loans, have an open and honest conversation with the prospective primary borrower first. Seek clear answers on:
- Exactly why they require a co-signer and can’t independently qualify
- How they plan to budget and afford the proposed monthly payments
- What other debts and expenses they currently carry
- What actions they will take if struggling financially to always keep payments current
- How long until they expect to no longer need your support as co-signer
- What recourse and protections exist for you if they default on the debt
Ask candid questions now before problems arise later.
Consult Legal Counsel
Strongly consider consulting an attorney before co-signing to fully protect your interests. Legal advice ensures you understand liability risks, options if the borrower defaults, and any recourse against them to recover losses.
Seeking counsel provides objective expert perspective on potential dangers before problems occur.
Formally Agree on Contingencies
If moving forward, formally execute a co-signer agreement laying out contingencies like requiring the primary borrower list you on title for any property purchased until released from loan obligations. Built in protections for your interests.
Start with Smaller Loan Amounts
When just beginning as co-signer, avoid jumping into larger, long-term loans. Start with smaller short-term amounts to gauge the primary borrower’s commitment to repayment and true character. Let experience over multiple loans guide bigger co-signing decisions.
Monitor the Loan Regularly
Check in frequently on payment status once the loan originates. Review statements each month to ensure the primary borrower makes every payment on time. Proactively address any emerging issues immediately before they escalate. Avoid the “set it and forget it” mentality. Stay engaged.
Weigh Decisions Wisely
Co-signing loans and other financing agreements requires careful consideration of rewards and risks. At Get Approved Canada, we advocate exhausting every option before resorting to co-signing which exposes you to long-term liability. However, if co-signing becomes necessary, our experts help structure agreements protecting your interests first.
