Co-signing for a loan means putting much more than just your signature on the line. It’s more like betting on a horse race, except you’re gambling on whether your friend or family member will repay a loan. Unlike placing a real wager, there’s almost nothing to gain but there’s certainly money to lose if they don’t repay.
Of course the object of co-signing isn’t about getting anything in return as much as it is about helping someone we care about. But before you decide to come to the rescue, here are six reasons to reconsider co-signing.
1. It’s a bad sign if they need a co-signer
The fact that your friend or family member needs a co-signer may be a red flag from the start. Whether their credit problems are a thing of the past or not, they may have a poor record of handling past loans and bills.
The person you’re co-signing for may be at higher risk of not repaying the loan in the eyes of the lender, which means you’re also at increased risk for being responsible for the loan when they don’t repay it.
2. You’re on the hook for the balance
As a co-signer, you’re not just letting your friend or family member take advantage of your good credit for free. The primary drawback of co-signing is that you’re agreeing to pay the loan in full if the primary borrower doesn’t.
In addition to being responsible for the loan balance, you’ll also be on the hook for additional fees from late payments or other costs for defaulting on the loan.
Even worse, in most states the lender can come to you, the co-signer, after only one missed payment by the primary borrower. They just might come to you first if they believe you have a better chance of repaying than the primary borrower does.
Attempts by creditors to collect aren’t just limited to phone calls and letters, either. Lenders and collection agencies can sue co-signers in court to force payment and can garnish wages until the cost is covered.
3. Your credit is on the line, too
Not only are you on the hook for the full balance of the loan as the co-signer, but you’re risking your credit as well.
For starters, whether the main borrower pays or not, this loan will increase your debt-to-income ratio, which can lower your credit score and hurt your ability to borrow money. Lenders often look at this when evaluating a mortgage application, so realize that you may become a less-qualified candidate if you plan to buy a house soon.
If payments are missed or the loan goes into default, that problem becomes even worse. These black marks will go on your credit and likely bring your credit score down even further.
4. There’s little upside for you
When you’re co-signing on a loan, there’s fairly limited upside for the co-signer.
Perhaps your credit score sees some benefit, but that’s only if payments are always made on time. In many cases, you’re just doing a favor and won’t own or use the item. Worse, you’ll be opening yourself up to large downsides including paying back the loan yourself or harming your credit if it’s not repaid.
5. You’re risking a relationship
While you may view co-signing to friends and family as helping, you might actually be putting your relationship on the line. Much like it is for loaning money to friends and family, the benefits might not outweigh the risks.
The FTC estimates that 3 out of 4 loans are ultimately paid by the co-signer. Now, imagine how that will affect your relationship with the primary borrower. Are you okay with having them owe you all this money? If not, saying “no” might be best.
6. You can give better help
There are better ways to help the person asking for a co-signer rather than taking on a loan with them.
Loaning or just giving them money directly, even if it’s less than they’re looking for, is likely lower-risk for you and your credit.
Your friend may not like these proposals, but if they’re seriously looking for help, explain that this is the best you can offer.