Your signature is used to say “YES THIS IS ME AND I AM OK WITH IT”
My friend Judith found this out the hard way. Judith called me yesterday crying; she just found out that her credit rating has been ruined. After listening to her sob uncontrollably, she finally told me the predicament she had found herself in.
Judith was asked by a family member to co-sign a car loan about thirty-six months ago. She said at the time she was reluctant to do it but another family member encouraged her to lend her R1* and I1** signature to help that family get a car loan. This family member swore that they would honour and make sure to pay on time.
*R1: This is a revolving credit that has been paid on time (i.e. line of credit, master card / visa). It is never the same amount and the payment date varies.
**I1: Installment payment: In which a debt is divided for payment at specified intervals over a fixed period. The amount is taken out on the same date and the amount stays the same for that term (i.e. mortgage, student loan, car loan). This is the highest score when payments are made.
Two months after she co-signed for the loan the bank called her to say that the loan is in arrears, meaning the amount it over due. What Judith did not know at the time is that if the bank has asked for a co-signer or Guarantor, they already know that this person may not honour any arrangements they made to pay anything on time with the person they co-signed for.
Over the past three years, Judith received calls from the bank regarding late payments, which she consistently relayed back to her family member to remind them to make payments.
Judith went to her bank two days ago to apply for a car loan for herself because her car had been giving her some trouble. Judith applied for a car loan at her bank and left expecting to hear that her loan had been approved. Her bank called her as promised and informed her that they could not approve her car loan because she already has a car loan at another financial institution. Judith said no, she did not have another loan and that the bank must be mistaken. The bank advisor gave her all the particulars about the loan and informed her that because the loan arrangements were not met on time her credit rating is listed on that loan as an I9*. This is when Judith realized that the loan she co-signed for her family member is listed as hers and because the payments were not made as agreed, it has essentially ruined her credit.
*I9: Installment payment: This is the lowest score when payments aren’t made.
Judith gave away her name and her independence by co-signing a car loan.
When you co-sign or you become the guarantor for someone else you are taking the responsibility that if they do not pay, you are accountable to cover the cost of debt. Even if the debt was paid and everything was done as it should have been done, the debt would still be listed as if it belonged to Judith. When the debt is sitting on your name it also limits the amount of credit you can now have, as this existing debt is counted as money owing even if you are only just the co-signer.
When someone asks you to co-sign a loan you should be able to comfortably say NO. Judith trusted her family member with her good name and they ruined it. She now has to rebuild her credit and that will take several years in order to put her credit rating back to #1 again.
Judith has learned a very important lesson; she has realized how valuable and important her signature is, this is not something you use lightly. She informed me that she was unable to secure a loan at her bank, however while shopping she was offered a loan at 19% which is 10 times more than she would pay at a dealership if she was able to retain her great credit report. Judith told me that if she had said NO she would have only lost a family member but by her agreeing to co-sign she has lost more, her family member and her credit rating.
My recommendation to each and everyone is…when you are asked to co-sign for anyone remember Judith and feel comfortable saying NO. Like oil and water, family, friends and money don’t mix.
Tessa- Marie Shillingford is the author of Controlling the Debt Monster. She is Personal Financial Planner, with a designation from the Institute of Canadian Bankers, and a Financial Counselor certified by the institute of Canadian Banker. She is presently a Program Facilitator of Financial Literacy at JVS Toronto. Tessa- Marie was employed by TD Canada Trust for twenty years in the retail section of the bank. During her tenure at TD Canada Trust she held various positions interacting with customers of the bank. As a Financial Advisor and Manager of Financial Services she led a group of Financial Advisors in helping customers of TD Canada Trust successfully manage their finances. Details of her book… Controlling the Debt Monster, can be found at http://www.controldebtmonster.com