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Should You Co-Sign that Loan?

Posted By Miranda Marquit On 12/12/2012 @ 12:03 pm In Debt | 6 Comments

One of the more interesting items I read recently on CNN Money had to do with a new trend: Looking for co-signers on Craigslist [3]. Co-signing a loan is a big enough risk without adding in the potential for getting scammed by a stranger over the Internet.

There are a lot of a reasons you shouldn’t co-sign, though. And if you want to make a profit from someone by helping them get a loan, you might be better off using other options, such as P2P lending.

Problems with Co-Signing for Someone You Find through Classifieds

Borrowers looking for co-signers on Classifieds sites like Craigslist actually offer money to those who are co-signing the loan. You might be offered $500 in cash to co-sign on a loan for $3,000. You get a little cash in your pocket, and the borrower is approved for a loan that he or she wouldn’t be able to get on the strength of his or her credit.

Right off, you can see that there are problems:

  • Scammers: First of all, you have to watch out for scammers. You are going to have to provide personal information to the financial institution if you are going to be approved as a co-signer. If you fill out a form for the “borrower” he or she can take that information and use it to steal your identity.
  • You are responsible for the loan: You should be very wary of co-signing for your own children [4], and even more wary of signing for a complete stranger who already has a history of credit problems. If the borrower doesn’t pay, the creditor can come after you. Do you really want to rely on a stranger for the well-being of your credit?
  • There isn’t real legal protection against the creditor coming after you: Some borrowers seek to assure co-signers that they won’t really be responsible for the debt, by offering to sign a contract that says so. However, when you co-sign, it’s not an agreement between you and the borrower. It’s an agreement between you and the creditor. And the creditor can still come after you.
  • Your credit is on the line: Your debt loan goes up when you co-sign, even if the borrower makes regular payments. Co-signing means you have responsibility for the debt, and creditors consider that when you apply for your own loans. Co-signing for anyone can reduce your creditworthiness.

Choosing to co-sign a loan is a heavy responsibility, whether you know the person or not. And it can affect your credit, as well as your ability to get your own loan in the future. Your best bet is to always avoid co-signing [5].

P2P Lending Instead

While it might be tempting to enter into a co-signing agreement with someone, you might be better off using P2P lending [6]. With this process, you can be the lender, rather than a co-signer. You can help others get the loans they are looking for, and earn money, since you are paid interest. You can start with as little as $25, and you don’t need to put your credit at risk.

If you are looking for a way to earn money while helping others get loans, P2P lending is a much safer choice than co-signing.

(Photo: aflcio [7])

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URLs in this post:

[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/should-you-cosign-loans.html

[3] co-signers on Craigslist: http://money.cnn.com/2012/11/08/pf/craigslist-co-signer/index.html?iid=SF_PF_River

[4] co-signing for your own children: http://www.bargaineering.com/articles/cosign-childs-loan.html

[5] avoid co-signing: http://www.bargaineering.com/articles/cosigning.html

[6] P2P lending: http://www.bargaineering.com/articles/invest-peer-peer-lending.html

[7] aflcio: http://www.flickr.com/photos/labor2008/3411464019/

Thank you for reading!