While the act may seem like the “right thing to do; no questions asked,” co-signing a loan with your spouse is more involved and potentially unsettling than it is often portrayed.
Even within a marriage where financial stability should be open and transparent, co-signing takes on different risks that exceed the risks of other familial finance sharing.
Co-signing a loan holds more weight and consequences than a shared savings account or checking account ever could.
The Purpose of A Co-Signed Loan
Above all else, it is essential to understand co-signing any loan, regardless of the other signee’s relationship, involves taking on the weight of someone else’s debt. Your signature is a binding agreement to guarantee the debt.
If the primary signee fails to pay the debt, you might be called upon to pay it — and any associated fees, interests, collection costs — on their behalf.
The resulting actions can be detrimental to the original borrower and the co-signer, possibly causing substantial damage to both parties’ credit histories, particularly if the debt ever goes into default.
The Spousal Element
Marriage fuses two lives into a single entity; two independent people willingly and consensually agree to be seen legally as a familial unit that is by law treated differently than two individuals would be treated. The predominating public view is that through marriage, all burdens – financial and otherwise – are now shared equally.
This can be a detrimental perspective to hold.
Each individual maintains a level of autonomy that is frequently overlooked when taking on financial baggage as a couple. The separate credit histories of two single people are not combined after marriage to create a new, single credit report.
Things To Consider Before Co-Signing A Loan With Your Spouse
While both parties in a marriage keep their own credit history, applying for shared credit changes the landscape significantly. If one party has bad credit, they may be refused a loan as an individual, but approved under the stipulation that the partner-with-better-credit co-sign.
Keep in mind this works both ways. If you have good credit and can afford a loan on your own, while your spouse’s credit could be damaging to the loan, you may want to consider not sharing the loan. The other party’s bad history could mean a declined application or higher fees and interest rates if the loan is shared.
Co-signed loans and any shared credit affect all signees’ credit. Regardless of who makes the payments, each signature carries the debt burden.
The risks can be substantial for co-signing loans, but the benefits might outweigh the risks. Particularly when a couple wants to purchase a home, mortgage loans almost always require two signees, in addition to looking at the collateral held and character of both parties.
Questions To Ask When Co-Signing
- Is the loan affordable?
As a co-signer, consider if you individually can heft the debt. If you are asked to pay, could you?
- What are the risks and rewards of carrying that credit on your own report?
Creditors will consider a co-signed loan as one of your lines of credit, even if you are not the primary name listed.
- What is the amount you might owe?
Make sure to have the specifics spelled out before you sign. Understand the complexity and gravity of the obligations you will take on through your signature.
- Will you be notified if the borrower misses a payment?
Transparency can save your credit. Understand how payments are set up and what happens if the payment schedule is not kept. Know up front how late or missed payments will affect not only the borrower, but you as a co-signer.
- Do you have copies of all pertinent documents?
Ignorance does not excuse you from responsibility. Make sure that as a co-signer you know the ins and outs of the loan agreement. Take on the responsibility as if it were your own, personal debt.
Keep the perspective that the loan is not just shared in case of emergency or shared to lessen the burden, but your own individual debt. Maintain the line of thought that co-signing is not the sum of two people’s responsibility, but the obligation of both individuals’ separately.
Shared credit does not need to be a death sentence for a couple’s individual credit reports, but the seriousness and magnitude of the agreement needs to be fleshed out and understood completely so catastrophic financial situations can be avoided.
As with any investment or contract, think before you sign. Take the time needed to really grasp the consequences your signature has upon your financial stability. Take control over your monetary situation by not being financially illiterate.
Contracts are legally binding agreements, whether you took the time to read the fine print, whether you understood the terms and conditions, whether you naively jumped into the agreement – or whether you did not.
Educate yourself and dispel financial myths. Take control of your financial health for tomorrow by investing in yourself today.