Your son wants to buy his first car, but the bank requests a co-signer? Does your spouse need a loan to start a business and can’t do it without a bond?
Before agreeing to endorse a loan, here are a few things to consider! When you endorse or endorse a loan, you agree to fulfill the obligations of the borrower if he defaults. In the event of non-payment or delay on his part, you will have to assume the reimbursement alone. It is a major commitment!
Risks of endorsing a loan
As an endorser, you are 100% responsible for the loan. You must, therefore, be able to pay the delays, monthly payments or total debt. But that’s not all!
Impact on your borrowing capacity
Being a co-signer on a loan affects your own borrowing capacity. This debt, even if paid by a third party, will be calculated in your debt ratio. A financial institution could, therefore, deny you a loan or charge you a higher interest rate.
Impact on your credit report
Delays or non-payment of a monthly payment by the borrower could take your credit report. Even if you finally repay the amount!
Risk of seizure
If the borrower does not repay the loan and you are unable to pay, your property or income could be seized.
Pay in the void
Even if you repay the loan, it is not your property to buy it. It remains the property of the buyer.
Fees and more fees
In addition to the unpaid monthly payments, you may have to pay late fees or penalties.
Forfeiture of the benefit of the term
In the event of late payment, the creditor could apply the forfeiture of the benefit of the term clause. This means that as soon as the borrower defaults on one of his obligations, the creditor can demand payment of the loan balance before maturity.
Before endorsing a loan
Before endorsing a loan, take the time to think! Here are some things to consider.
- Check with the financial institution why it requires a co-signer. You will have there an index of the risks which you take in its place.
- Analyze your own financial situation. Would you be able to take on the monthly payments of the loan? If the creditor uses the forfeiture clause of the benefit of the term, will you be able to repay the balance of the debt? By the end of the loan, are you likely to need to borrow for yourself? If yes, will a financial institution accept to lend you even if you have taken out a loan?
- Consider the impact of a default on your relationship with the borrower. What will happen if the person misses a payment for a reason that you consider futile? Or are you trying to save a relationship by agreeing to endorse?
If you get started, take precautions. Negotiate a few clauses and make sure they are added to the contract. For example, if the principal borrower is late in paying, request that this information not be included in your credit report if you pay before 30 days.