There could be many instances where a family member approaches you to co-sign a personal loan. Your younger cousin may need a working adult to act as a guarantor for an education loan, or your aged auntie may need someone with a full-time income to jointly apply for the renovation loan she needs.
You may think it’s ok to lend a helping hand; after all your loved ones have promised to repay the loan. However, co-signing a loan comes with serious implications, and you may even be opening yourself up to potential legal trouble.
Here’s what you need to consider before co-signing a loan of any type.
One of the most crucial things to know is that as a co-signer of the loan, you are legally liable for the loan as if you have applied for the loan yourself.
This means that you are equally responsible for servicing the loan and must ensure that monthly repayments are made – even if the money has to come out of your own pocket.
Understand that even though you have agreed to share liability for the loan, your obligations go beyond the principal loan amount.
You will also be on the hook for any service fees or interest charges incurred as part of the loan package. The worst of these would be penalties imposed for late or missed payments, which can quickly rack up to a significant amount because of compounding interest.
Should the primary borrower become unable to repay the loan, the lender has the legal right to come after you to make good on the debt. Now, don’t underestimate the massive impact this can have on you.
Lenders are not obligated to wait till they have reached their last resort before initiating debt recovery action against co-signers. Instead, they will pursue the course that has the greatest chance of recovering the loan.
So, for instance, if the primary borrower seeks bankruptcy protection (causing debt recovery to be delayed), the lender could decide to go after the co-signer in an attempt to get their money back quicker, while avoiding lengthy court processes.
Hence, do not think that as the co-signer of the loan, your responsibilities are somewhat diminished. This is not the case.
Co-signing a personal loan will cause it to be recorded in your credit report.
This will impact how indebted you are considered to be, which will increase your interest rates when taking other personal loans on your own.
Be aware that loans you co-sign will also count towards your individual borrowing limits, ultimately reducing your credit quota. Under prevailing rules, an individual’s borrowing limit is capped at 12 times their monthly income.
In addition, co-signing a loan will also cause the accompanying debt obligation to count towards your Total Debt Servicing Ratio, potentially limiting how much you can borrow in a home loan.
Also, remember how you are considered to be equally responsible for the loan?
Well, this means that should the primary borrower fail to make loan payments on time, the late payments will also show up on your credit report. This, in turn, will lower your credit score and decrease your eligibility for further credit facilities.
If you’ve been approached to co-sign a personal loan, consider the following carefully:
- Can you afford and are willing to repay the debt on behalf of the primary borrower?
- Is the primary borrower able to repay the debt, and what is their credit history?
- What are the terms of the loan (interest rate, fees, and charges)?
- What is the limit of your liability as the co-signer? A specified amount or unlimited?
- What are the exact circumstances under which you will be asked to repay the loan?
Need a personal loan but can’t find a co-signer? With Synergy Credit, you won’t have to. Our personal loans require only minimum credit checks and are approved in as little as 20 minutes. Speak to our friendly staff now.