Avoid co-signing like the plague

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For more than a decade I have been telling people to avoid loan co-signing like the plague. Why? Because, all too often the co-signee has a financial hiccup that ends with the co-signer having to make one or more payments. This can lead to embarrassment, anger and, all too often, broken relationships.

Almost one quarter (24.2 percent) of consumers have a FICO credit score below 600 according to the most recent numbers available from the California-based credit scoring company. A credit score in that range would translate into having “bad,” or sub-prime, credit. These consumers often find it difficult to qualify for a lease on an apartment or house, and many try to boost their chances with a co-signer. A landlord may be more willing to take a risk on someone with bad credit as long as they’re backed by someone with good credit — someone who’ll pay if the leasee does not.

Typically, a family member or loved one is asked to co-sign the lease. But that’s starting to change. Websites like Craigslist have posted ads from strangers who are willing to co-sign for a fee. And now, companies are getting into the co-signing business.

I’m not sure if that’s good news for consumers or not. These companies charge big fees to co-sign a lease. One web-based firm, Co-signer.com, charges $720 to guarantee a $1,000-a-month lease for three months. That’s almost one quarter of the total amount in lease payments.

My concern is that this is another product that could potentially take advantage of consumers with bad or no credit. Unless the lease agreement mandates that, in case of default, the landlord must turn to the co-signer to satisfy the lease, the consumer could still be held responsible. The landlord could still pursue the consumer for missed rent payments, even though the consumer has paid a high fee to have the lease guaranteed. Should the corporate co-signer fail to pay up, or be difficult to reach, it is the consumer who will be easy to sue.

Before paying to have a lease guaranteed, I would encourage consumers to thoroughly review the lease agreement and ask the landlord the procedure for collecting any unpaid rent. I’m not a big fan of co-signing because of the many and varied possibilities for hard feelings and financial woes for both parties. I really don’t want to see consumers pay a large fee and still be left on the hook for any default as part of the bargain.

Times may change, but my advice remains the same. Avoid co-signing like the plague!

What do you think?