Co-signing a loan can help someone access credit that they might not otherwise be able to obtain, but experts say it brings risk both to your credit rating and your relationship with the person you are trying to help if things go wrong.
Niroch Kanapathypillai, an RBC financial adviser in Ottawa, says before deciding to co-sign for a loan you need to assess your own borrowing needs because taking on the responsibility of co-signing will affect your own borrowing power.
“If you’re planning on signing for a five-year loan, what are your plans personally, for the next five years,” he said.
“Because when you sign as a co-signer for a loan, this will impact your ability to borrow more money later on.”
Typically someone co-signing a loan is a parent trying to help out a child, but there can be in other situations, often other family members.
When you co-sign a loan you are committing to take on the obligations of the loan if the main borrower is unable to repay the debt. If things go wrong, that means you will be on the hook for the loan and have to repay the money.
Kanapathypillai says when things go well a co-signer can help a new borrower navigate the borrowing experience and help them build credit. The problems arise if the main borrower can’t make the required payments.
If you decide to co-sign a loan, Kanapathypillai says you should get your own copies of all the loan statements so that you can keep track of payments without having to rely upon the main borrower and step in and make a payment if necessary.
“Any missed payments on this credit item that you are co-signing for, will impact your credit,” he said.
Financial literacy and credit counsellor Pamela George says if things don’t work out the damage can be devastating.
“It’s very, very risky when you sign as a guarantor or you sign a joint loan with someone, you might as well tell yourself it’s my loan, because that’s really what it is,” she said.
George says parents looking to help a child by co-signing a loan need to have a serious conversation beforehand about the risks because when things go wrong the strain can be both financial and emotional.
Everyone involved needs to understand their obligations when it comes to the loan.
“I would say even when you’re asking somebody to co-sign or be a guarantor, even that is putting their relationship at risk,” she said.
George says she wouldn’t do it because of the risks to both her finances and her relationship with the borrower if things went wrong.
“Those who know me well know not even to come and ask because the answer would be no,” she said.
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