Signing as a cosigner for a lease in the Philippines can seem like a simple favor for a friend or family member, but it actually comes with significant financial risks. It’s crucial to understand these risks before you agree to be a cosigner because you’re essentially promising to cover the rent if the tenant doesn’t pay.
What Does It Mean to Be a Lease Cosigner in the Philippines?
Being a lease cosigner, also known as a guarantor, means you’re legally responsible for the tenant’s obligations under the lease agreement. Think of it like this: the landlord wants assurance that rent will be paid. If the tenant fails to pay, the landlord will turn to you. It’s not just about missed rent; it can also include damages to the property beyond normal wear and tear.
Essentially, you are backing up the tenant. Let’s say your niece just got a job in Manila and wants to rent an apartment. She’s fresh out of college and doesn’t have a strong credit history, so the landlord requires a cosigner. If you cosign, you are promising the landlord that you will pay the rent and cover any other costs related to the lease if your niece doesn’t.
The Financial Dangers of Cosigning
The biggest risk is, of course, having to pay the rent yourself. This is probably what you imagine when you think about cosigning. But it goes beyond just the monthly rent. Imagine your friend suddenly loses their job and can’t pay their rent. You’ll be responsible for the unpaid rent for the remainder of the lease term, which could be several months or even a year. If the rent is PHP 20,000 per month and your friend has six months left on the lease, that’s PHP 120,000 you could be liable for. This can severely impact your personal finances.
Furthermore, the landlord might add penalties and legal fees if the rent payments are delayed or if the tenant leaves the property before the lease ends. In such cases, these costs are added to the original debt owed to the landlord and could potentially cause a greater financial burden. This is because a typical lease will include a section on late fees, and penalties for early termination of the lease. You, as the cosigner, are on the hook for these too.
Another financial issue is damage to the property. If the tenant moves out and leaves the place a mess or causes damage beyond normal wear and tear, the landlord can deduct the repair costs from the security deposit. If the deposit is not enough, the landlord can pursue you, the cosigner, for the remaining balance to cover repair and restoration expenses to the property.
How Cosigning Can Affect Your Credit Score
Many people don’t realize that cosigning can also impact your own credit score. While cosigning itself doesn’t automatically appear on your credit report, a tenant’s failure to pay rent will. The landlord might report the delinquency to credit bureaus, impacting your score in much the same way it impacts the tenant’s credit rating. A negative credit report will affect your ability to get loans, credit cards, and even insurance in the future. Securing credit cards in the future will be difficult because lenders will flag you as a high-risk borrower; therefore, having lower limits or higher interest rates is inevitable.
Before being a cosigner, check first if the landlord will report the tenant (and/or cosigner) payment history to credit bureaus. In the Philippines, credit reporting is becoming more common, so this is a relevant consideration. Even if they don’t initially report, landlords can seek legal remedies against you if the tenant fails to pay – a judgment against you is a matter of public record and will show up in credit checks performed by potential creditors.
The Psychological Toll
Beyond the financial burdens, cosigning can take a toll on your relationships. Imagine constantly worrying about whether your friend or family member is paying rent on time. You might feel compelled to constantly check in on them, which can create tension and strain the relationship. If the tenant does default, it can lead to resentment and conflict between you and the tenant, particularly if they are unable or unwilling to repay you. No one wants to be stuck in the position of constantly chasing after a loved one for money.
Imagine having to constantly follow up with them about rental payments, which is stressful. It could eventually take a toll on your mental and emotional well-being. Sleep deprivation can also be experienced because of worries. The initial simple favor of being a cosigner turns into a source of constant concern and conflict.
Talking to the Prospective Tenant Before Cosigning
Before you even consider cosigning, have an open and honest conversation with the potential tenant. Ask them about their financial situation, their job security, and their plans for the future.
- Understanding Their Finances: Are they currently employed? What is their monthly income? Do they have any outstanding debts? Inquire about their spending habits. Do they have a history of managing money responsibly?
- Job Security: How stable is their job? Are there any pending issues at work that could impact their employment? What are their long-term career goals?
- Financial Goals: Do they have any major financial goals that might impact their ability to pay rent (e.g., starting a business, buying a car)?
Follow us on LinkedIn!
It’s alright to be blunt about the risks involved and what your expectations are. Explain to them that you’re willing to help, but you need to feel confident in their ability to meet their obligations.
Consider These Alternatives Before Cosigning
Cosigning shouldn’t be considered as the first and only option. Here are alternative options that can be explored to assist the potential tenant, while mitigating your own financial exposure:
- Help them build their credit:. Encourage the prospective tenant to establish a credit history by opening a secured credit card or becoming an authorized user on your credit card (this means you’ll permit them to charge purchases to your card). Responsible credit use can increase their score.
- Suggest a different rental:. The prospective tenant can also consider renting an apartment that is more within their budget.
- Offer financial advice:. Assist them in creating a budget and finding ways to save money to meet rental payment obligations.
Essential Things to Do Before Agreeing to Cosign
If, after careful consideration, you decide to proceed with cosigning, taking certain precautions can greatly minimize the financial risks involved.
- Read the Lease:. Carefully read the entire lease agreement before signing anything. Understand your responsibilities as a cosigner. Pay attention to penalties for late payment, early termination of the lease, and damages to the property.
- Negotiate Terms:. If possible, negotiate the terms of the cosigner agreement. For example, you might try to limit your liability to a specific amount or a specific period of time.
- Get Everything in Writing:. Make sure that all agreements and understandings are in writing. This includes any limitations on your liability or any promises made by the tenant.
- Stay Informed:. Stay in communication with the tenant and the landlord. Ask for regular updates on rent payments and property maintenance.
Cost Considerations
The financial impact of failed payments can be significant, and here you should consider the cost implications.
- Rent Arrears: The most direct cost is covering the tenant’s unpaid rent. For instance, if rent is PHP 15,000 per month and the tenant defaults for three months, the cosigner owes PHP 45,000.
- Late Payment Fees: Many leases include late payment penalties. These can add hundreds or thousands of pesos to the outstanding balance.
- Property Damage: Should damage to the property exceed the security deposit, the cosigner is responsible for the repair costs, which can range from minor repairs to tens of thousands of pesos for significant property damage.
- Legal Fees: If the landlord pursues legal action to recover unpaid rent or damages, the cosigner could be liable for legal fees, court costs, and other associated expenses.
Follow us on LinkedIn!
Real-Life Experience and Examples
Many people have cosigned for leases without fully understanding the risks involved, leading to significant financial and emotional distress. A family member, for example, cosigned an apartment for a close relative who later lost their job. The cosigner was then forced to shoulder several months of rent, straining their own financial resources. Another scenario involves a cosigner responsible for property damages after the tenant moved out, leaving behind substantial repairs. These situations highlight the critical need for due diligence and understanding of your obligations as a cosigner.
The Importance of Due Diligence
Due diligence is critical when weighing whether to cosign. It’s not just about trusting your friend or relative. It’s about assessing their financial situation and understanding the legal obligations of the lease. Ask for references you can contact to vouch for the prospective tenant. Gather as much information as possible to assess whether cosigning aligns with your financial values. In the Philippines, the lack of readily available comprehensive credit reports (like in other countries) makes this due diligence even more critical.
Living with the Decision
Cosigning can affect your way of living and financial decisions. If you are tied up as a cosigner, it may limit the funds needed for other endeavors. Securing personal loans may be difficult, because the current landlord may report the tenant to credit bureaus in case that the rent is unpaid, and would affect your score, too. Major purchases like a car or a house might be affected because lenders will see you as a higher risk borrower, or you may be subjected to higher interest rates.
Desire to Help vs. Financial Security
There’s always pressure to help out a friend or family member, however, it’s crucial to weigh the potential impact on your own finances and lifestyle. You can offer help in ways that don’t involve risking your own money. As such, you can help your friend make a budget plan, build a resume, review job options, and other opportunities other than being a cosigner to mitigate the need to assume risk for the tenant.
FAQ Section
Here are some frequently asked questions to further help you understand the subject of being a cosigner.
What if the tenant and I have a falling out after I sign the lease?
Unfortunately, your personal relationship with the tenant doesn’t affect your obligations as a cosigner. You are still legally responsible for the lease regardless of any issues between you and the tenant. This is why it’s so vital to be very confident in their ability to pay rent before you cosign, not just if the tenant is a relative or friend.
Can I remove myself as a cosigner before the lease ends?
Generally, it’s difficult to remove yourself as a cosigner before the lease ends unless the lease agreement specifically allows for it. Some leases might have a clause that allows a cosigner to be released if the tenant meets certain conditions (for example, consistently paying rent on time for a specified period). However, it varies by contract, and the landlord must agree to release you from the agreement.
What happens if the tenant declares bankruptcy?
If the tenant declares bankruptcy, the landlord can still pursue you, the cosigner, for the unpaid rent. The tenant’s bankruptcy may discharge their debt, but it doesn’t automatically discharge your obligations as a cosigner unless the lease clearly indicates that. In such cases, you must seek legal advice from expert lawyers for appropriate consultation to properly discuss your legal options.
The tenant skipped town without paying rent—what do I do?
If this arises, the landlord will reach out to you to fulfill the obligations. Contact the landlord immediately to discuss a payment plan. Don’t ignore the messages because it can affect your credit reports, too. Depending on the terms specified in the contract, consider getting your own lawyer to explore your options.
References
- National Credit Information Corporation (NCIC)
Don’t take cosigning lightly! Instead of jumping in, pause, and consider if being a guarantor aligns with your financial goals and priorities. There are other ways to support others without jeopardizing your financial future. Explore other helping options that let you provide support without taking on the responsibility. Your financial peace of mind is well worth the effort of exploring different strategies!
