One of the more controversial topics in the credit world, and especially for anyone re-establishing credit after bankruptcy in Canada, is whether or not to get a co-signer for a loan. Depending on who you ask, the advice may be either “yes,” “no” or “maybe.” An ex-bankrupt Canadian recently discharged from bankruptcy may be tempted to take the quick and easy way out by getting a family member or friend to co-sign for a loan or lease that would have been otherwise unattainable. Let’s look at the two options here:
Using a Co-Signer After Bankruptcy
Without a doubt, this is the easiest way to get the loan you want. Let’s say you want or need to get a loan for a car or a house or a lease on an apartment after being recently discharged from your bankruptcy. You submit the loan application and find out that it will be approved only if you get a co-signer. Or ideally, you’re a bit more proactive and ask ahead of time how likely you are to be approved based on your circumstances. It can be very tempting as you look at that shiny new car in the showroom. Or a cute little house that’s just perfect in every way.
PROS: You won’t have to wait to get what you want. It could take a few more months or years before you would be able to get approved for a loan like this on your own. Instant gratification. But you could be moving into that new house as quickly as the mortgage closes. Or move into that awesome apartment next month. Or drive off the car lot in that new car today. If you have circumstances that make it absolutely necessary to get that loan or lease today, and not in a few months or years, then you may have no choice but to get a co-signer.
CONS: Your credit profile won’t be as strong in the eyes of some lenders. This is debatable depending on who you ask. A lot of credit scoring guidelines are kept strictly confidential – often times the employees don’t even know them! (or they aren’t permitted to disclose them). So, don’t believe it when the agent you ask tells you that it doesn’t matter if you used a co-signer. It might matter, they just don’t know it. Or care. Your score may be artificially lower, or you will be declined, or at least required to get a co-signer again for your next loan if a lender sees that you used a co-signer this time.
When Is It OK to Use a Co-Signer?
Knowing what I know now, I would NEVER use a co-signer or have someone co-sign for me. But, there are a few circumstances where it might be acceptable. For the most part, adults seeking credit after bankruptcy is NOT one of those circumstances.
I once got some valuable advice from a finance manager at a Ford dealership. She told me that it does not look good if you’re over 25 years of age and have, or need a co-signer. It’s a bit more understandable if you’re 18 and brand new to the credit world. Or in your early 20s and just graduated from post secondary education as you enter the workforce. But not for anyone older than that. You can’t keep relying on mommy and daddy (or grandma, your brother, a friend, or anyone else). It’s time to do this on your own!
If You Use A Co-Signer Once, You’ve Set The Expectation For It In Future Credit Applications
It’s hard to verify, due to the fact that many lenders and the credit bureaus keep their credit guidelines secret, but once you have used a co-signer once, future lenders may also want you to get a co-signer. They’ll take the stance that if the other company felt there was a risk in trusting you and you alone, that they don’t want to take the risk either. Plus, a co-signed loan may actually lower your credit score, outweighing any benefits of the on-time payments you’ll be making.
You also put your co-signer’s credit on the line. In the event you miss a payment, it will impact both your credit and that of your co-signer’s. If you don’t pay, then the lender can legally make your co-signer pay the rest of the money in full (that’s the idea behind getting a co-signer after all). I know, you’re saying “oh don’t worry, I won’t let that won’t happen.” Yeah, good intentions don’t always work out. Better not to risk it. If you screw up, you deserve a hit to your credit profile, but don’t drag someone else down with you. If you have a good relationship with someone, ruining his or her credit is a great way to ruin that relationship too. On the other hand, if you keep up an impeccable payment record, but the primary name on the loan had to be your co-signer, you might only be building up his or her credit and not your own.
Turning the tables around, when YOUR credit is good enough to be a co-signer for someone else, DON’T do it! You’re not helping the other person build his or her own credit. And if they default on the loan (which they might if they need a co-signer), your credit will suffer, there will be resentment between the two of you and you’ll end up looking like the bad guy. Don’t believe me? Go watch a few episodes of Judge Judy and you’ll see!
Avoiding The Use Of a Co-signer
Obviously, you’ll have to wait a bit longer to get the loan or lease you wanted if you can’t get credit on your own and you decide not to use a co-signer. Depending on when you were discharged, the strength of your credit profile and the company you are seeking credit from, the amount of time will vary. Today, the typical requirements for approval on loans and mortgages are 2 to 3 years after your discharge date (that’s your DISCHARGE date, not the date you filed for bankruptcy), and at least 1 to 2 years of NEW re-established credit. Some places will accept just one new source of re-established credit, while other will like to see at least two. Once you’ve met these requirements, and your credit score is strong, that will open up a lot of options for you.
PROS: If you wait until you can get approved on your own, without the help of a co-signer, you will be building up YOUR credit, and not someone else’s. Your credit score could be higher with a loan solely in your name versus a co-signed loan. Best of all, you’ll feel so much better about yourself! What a milestone to be reached – being approved for your first loan, mortgage or lease after bankruptcy! Imagine the feeling of pride and accomplishment when you can truthfully say that you got that car or house completely on your own? Show all the naysayers who told you it couldn’t be done after a bankruptcy that it CAN be done!
CONS: Obviously, it will take longer. It could be a few months (or if you’re lucky, maybe just a few weeks). It could also take a year, maybe two, or even a few years if you’ve managed to rack up some new bad credit since your bankruptcy discharge. Time will heal a lot of things. If it’s not absolutely crucial to get the loan or lease application approved right away, you’ll have to live with without that new car, apartment or house a bit longer.
Unless it’s absolutely critical to get that a loan or lease approved immediately, and it requires a co-signer, then you have to do what you have to do. However, we often forget the distinction between wants and needs. Most of the time, we can hold off a bit longer and qualify on our own at a later date.
Remember, a credit application that you initiate will count as a “hard hit” on your credit profile, thus lowering your FICO credit score. Make sure you ask plenty of questions before applying for a loan, a mortgage or a lease. Only apply when you are at least 99% sure that you’ll be approved. Of course, just about every credit issuer will tell you that there’s absolutely no way they can guarantee you’ll be approved or need a co-signer until you submit an application. That’s understandable. If the first person you talk to can’t at least give you some sort of idea of how likely it is that you’ll be approved based on your individual circumstances, move on to the next one. It’s not worth the risk lowering your credit score. Some places have a rule that they won’t approve you until at least 6 years after your bankruptcy discharge date. Even worse is to apply when it seems fairly certain that you’d need a co-signer in order to be approved.
Don’t worry. That “perfect” car or “dream” house or “deal of the decade” will come along again. It always does. Trust me. If you can’t get it now, it wasn’t meant to be. That can be a good thing. This may sound cliché, but you know the old saying, “patience is a virtue” or “good things come to those who wait.” Nothing could be more true when re-establishing credit after bankruptcy.
A Quick Story Of How I Almost Gave Into Temptation
Let me tell you a quick story about the time when I almost gave into temptation just 12 months after my bankruptcy was discharged. You have no idea how much I wanted that shiny red (then) brand new 2009 Ford Ranger Sport 4×4 truck. It was a modest request – not the cheapest vehicle on the lot, but by far not the most expensive one either. And you guessed it – I was turned down based on my own credit. I not only didn’t want to rely on a co-signer, I didn’t even have anyone who would co-sign for me! (since it was more of a wish than a necessity). Dejected, I paid $1100 cash for a used 1998 Ford Windstar minivan. All I really needed was something with more cargo space. Of course, that 11 year old minivan wasn’t quite as stylish as the brand new shiny red 4×4 pickup truck I had been drooling over, but it got the job done. In fact, I still have that old van and use it as a second vehicle.
Wants VS Needs Can Lead to Impulse Co-Signing
Should you find yourself needing the help of someone else’s credit, ask yourself, “is this something I want, or something I need?”
If you’re thinking of a new car because your current one is a bit old or drab looking and you want to impress your friends, neighbours or co-workers, then forget it! Use your old car, borrow a car, rent a car as needed, or take public transit if that’s a viable option. You could buy a used car for cash. But whatever you do, please don’t get a sub-prime loan for a 5 year old used car at 29% interest or something crazy like that.
Maybe it’s new apartment or house you’re after. Think hard if you can stay in your current one a bit longer. Or, in the case of renting, find a landlord who won’t do a credit check. A homeowner renting out a basement suite or an individual who bought a house or condo as an investment property may be more interested in finding a quality tenant with the money for rent and a deposit (where applicable) than a credit check. Large apartment complexes owned by corporations or run by property management companies are very likely to do a credit check. And they don’t like a bankruptcy to appear on your credit report, even if it was several years ago. Trust me. If you’re OK with a roommate, share a house with someone else, or if you can handle it, rent a room in house. Myself, I’d rather have my own place, even if it means a few sacrifices.
Besides, the longer you need to wait in order to have a credit application approved without a co-signer, the more time you have to save money for a bigger downpayment! The best thing for your credit profile, and for your own self esteem is to only get credit that you can obtain on your own, without the help of a co-signer. Especially if you’re over 25 years of age.