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Should you co-sign a loan? What you need to know before you do

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After years of historic low interest rates the Bank of Canada has been steadily raising rates with another hike possible on Oct. 26, 2022.

It’s putting more pressure on some borrowers who are rejected for loans to seek the help of a co-signer so they can be approved.

"You really want to be sure that an individual that you’re co-signing for can cover those payments, because you're going to be on the hook for them if they are unable to,” said Gursh Singh, client experience manager with Credit Canada.

In 2018, Credit Canada said, banks rejected 20 per cent of mortgage applications and it expects those figures to become even higher with rising interest rates.

Some people who apply for loans or mortgages are rejected because they don't have the income or credit history to be approved and that’s when they may come calling on a family member or friend to co-sign their loan, but if you do it's a very serious financial undertaking.

Credit Canada said it’s already noticed more clients seeking help after co-signing loans for friends and family members.

When you co-sign for a loan you are 100 per cent responsible for the funds if the person you co-signed for can't pay them back.

If the applicant dies, the co-signer inherits the debt. In a divorce from an applicant, a co-signer is jointly responsible for their divorced partner’s loan. pat foran

Co-signing could also limit your borrowing power, lower you credit score and damage your relationship with the borrower if the loan goes off track.

Singh said you should never co-sign for someone unless you know their complete financial situation including seeing their credit report and income statements.

"You want to know all about all other debts that they have. You want to know about any income and expense issues that might be occurring in their household budget," he said.

Evelyn Jacks is the President of the Knowledge Bureau, an education institute that provides ongoing professional development to tax and financial professionals.

Jacks said people should really consider all aspects of co-signing before they go ahead and do it.

“It is a very serious understanding that comes with a lot of responsibility and before you co-sign make sure you take a step back and understand all the consequences," Jacks explained.

Jacks said co-signing a loan can also affect your tax and estate planning and she is also concerned about parents who used their home equity lines of credit to give money to their children now that interest rates are rising.

“It might have sounded like a good idea last year, but this year interest rates are higher and home values are dropping, so now it's a completely different story" said Jacks.

Co-signing could help a loved one get a loan they have been turned down for, just know it is a serious agreement and you may wish to consult with a lawyer or financial planner before doing so.

Also, once you co-sign it can be very difficult to get your name removed from a loan and if you need to borrow money yourself you could be turned down if it appears you have too much debt.

While you may want to help a friend or family member, just make sure it’s something you won't regret doing.

   

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