What to Know About Co-Signing Debts


Co-signing is a common phenomenon in the lending world. People use co-signing to take out a loan or line of credit that they are failing to get approved for. They do this by signing on with someone with better credit and a more solid financial history. This practice requires trust and agreement and, thus, is most commonly practiced with close friends, family, and relatives.

However, co-signing can be a contentious subject in the world of finance. People disagree about whether it is a good and beneficial practice or more harmful in the long run. Many people also do not fully understand what the process entails. The best way to deal with some of the harmful side effects of this practice is to understand the ins and outs to ensure you understand your options. At Kevin Thatcher & Associates, our team of bankruptcy and insolvency trustees in Toronto can guide you in navigating your difficult co-signing journey. Here’s everything you need to know about co-signing debts today.

What does co-signing debt entail?

When someone co-signs for you, they will be putting their name and credit history at stake with your loan. They will be held just as responsible for your loan as you are! It can be a great way to utilize someone’s good credit history to help you reach your goal, however sometimes you don’t qualify for a loan because you can’t afford it. In these cases signing someone else into the mix will put you both at risk and can have devastating consequences.

Co-signing a debt entails the following process:

  • There are two parties who are legally responsible for the line of credit or debt they are signing on to. They will then be held legally responsible for repaying the entire monies to the lender. This is part of a scheme termed “joint and several liability.”
  • If your main borrower or the co-signer are unable to make the payments (this is a common occurrence, as misunderstandings or personal issues do come up), the other will be liable to repay the entire balance. The lender will demand the total amount from anyone listed in the loan agreement.
  • Co-signing agreements can often come with an acceleration clause. This entitles the lender to the entire balance in case of any issues or breaks in the agreement, like missing payments.

What are the benefits of co-signing?

There can be benefits to co-signing with someone you know. The primary signer or co-signer can help a friend or family achieve their goals. This can aid someone in getting a car, a house, or affording their dream school. They just have to be prepared to pay for the full amount if the person is unable to pay. The other benefits of co-signing include:

  1. Co-signing impacts credit for both parties: The main benefit is that it helps build credit for both signers. Co-signing is typically undertaken by those who have a lack of financial history or poor credit score. Thus, the opportunity to rebuild their credit or drastically improve it for the future is very helpful. The co-signer attached to the agreement as the primary signer will also get the chance to improve their score. However, this is contingent on the payments being made on time.
  2. Co-signing leads to better interest rates: Those with poor credit scores often have to pay higher interest rates than those with good credit scores. This is because borrowers with low credit scores are considered to be more risky investments by lenders, who then place a higher interest rate on their loans to them. Utilizing a primary signer with a good credit score makes you eligible for better interest rates! You will be able to take advantage of your co-signer’s credit score.

What are some of the consequences if co-signing goes wrong?

Many people oppose the idea of co-signing because it makes it easier for the lender to recover their money. If you’re unable to make a payment or your co-signer defaults, there can be some severe consequences. Creditors are entitled to the entire balance amount. They can enforce this by constantly contacting you directly or through collection agents. Another negative is that your creditors can notify Equifax or TransUnion about your defections. This can significantly hurt your credit score. A poor credit score, in turn, will affect your overall borrowing capacity, which will make it challenging to take out loans in the future. This can become a vicious cycle, ending in legal action, wage garnishment, and even asset seizure.

Is there a difference between guaranteeing and co-signing a debt?

There are a couple of differences between co-signing and guaranteeing. Guarantees are used to take out business debts, loans, and mortgages. This is typically done when the borrower has insufficient income and poor financial history. The guarantor thus backs the applicant when they are looking out for financial assistance of this sort.

On the other hand, co-signing can be applied to any credit, loan, or line of credit. Both the signers are equally responsible for the amount. The lender can demand payment from either of the signers.

What are some options besides co-signing?

Remember that when it comes to dealing with debt, you have many consolidation options. If you feel that co-signing is not suitable for your situation, you may want to turn to debt consolidation. The right bankruptcy trustee in Toronto will present you with options that will help you manage your debt. For example, many people find that consumer proposals are the right choice because they cut down the deficit into smaller, more affordable chunks.

If you are considering co-signing a debt, it does come with some benefits and some disadvantages. If you’re feeling worried about your financial situation, we encourage you to reach out to a licensed bankruptcy trustee or professional credit counsellor. They will be able to educate you on the best debt management options available. Reach out to our team anytime for financial advice and support during these worrying times.

To set up a consultation or meet with a licensed bankruptcy trustee in Toronto, call Kevin Thatcher & Associates at 1-888-702-9801 or contact us here.

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