Co-Signer: Co-Partner?

Consider a co-signer to be your financial partner—you must share, truthfully, your financial history, and openly disclose any indiscretions. You must build trust. You must be true to your word. But most of all, you should never forget that another person’s future is tied to yours.

“If you act as a co-signer, you have to be fully prepared to step into the shoes of the borrower,” says Jeff Schwartz, Executive Director of Consolidated Credit Counselling Services of Canada. “The good, the bad, and the ugly.”

So why do people enlist the help of co-signers?

Most of the time, they simply don’t have a choice. A co-signer is typically required in one of two situations: your credit may be “bruised,” as Schwartz puts it, or you may have a lack. In this case, a lack refers to a lack in income, or a lack of credit history. No credit history can be as bad as poor credit history, an issue for many new Canadians. Sure, an alternative route to a loan would be building credit, but this option takes time and discipline. Another choice is pledging collateral, but not everyone owns possessions of value.

Its these circumstances that merit a co-signer. Maybe the borrower requested too large a loan, or maybe their income is sufficient but too variable—seasonal or freelance workers frequently face this problem. The co-signer becomes the solid foundation upon which the borrower can build their future financial steps. But this arrangement is not without its complications.

When agreeing to be a co-signer, the person agrees to become responsible for your debt, should the situation ever arise where you are unable to pay it. The lender then assesses the co-signer’s financial situation as if they were the borrower. “The co-signer has to stand on their own two feet,” says Schwartz. “If the borrower doesn’t pay, could you pay it? Do you have the ability and desire to do it?” Any late—or missed—payments show up as such on the borrower’s credit report, as well as on the co-signer’s credit report.

“Its very important to communicate with the borrower beforehand,” advises Schwartz. “How will they pay back the debt? If the bank is hesitant, maybe you should be hesitant too.” 

Recognizing that becoming a co-signer transfers a host of financial responsibility is crucial—damaged credit, limited borrowing ability in the future, and loan repayment are just a few of the negative repercussions should the situation turn nasty. But its not all bad.

“If you have a good credit score, your borrower may get better terms on their loan,” says Schwartz. Having a co-signer who is in good financial standing also gives the borrower the opportunity to negotiate a better loan contract. While standing on your own two feet, financially speaking, may give you bragging rights, sometimes its worth enlisting the help of a co-signer if it means you save money in the long term. Now there’s something to brag about!

But the best piece of advice in regards to financial relationships is much like all other relationships: familiarize yourself terms and conditions of the relationship into which you’re entering, and keep communication open and honest. Keep the arrangement mutually beneficial.