You might want to help a loved one obtain a loan by cosigning. Learn more about the pros and cons of cosigning loans so you can be sure you know what you’re getting into as a cosigner. [Duration- 2:27]
Co-signers offer valuable support to borrowers with low credit scores or a limited credit history. Adding a financially experienced co-signer to a loan or lease may improve the chances of an applicants approval. However, co-signing an agreement can also have negative consequences for the co-signers financial well-being.
As a friend or family member you may feel inclined to help out someone in need by co-signing a loan for them. However before you put your name and credit score on the line, it’s crucial to understand all the risks involved. Co-signing a loan is not something to take lightly.
In this comprehensive guide, I’ll walk through the major risks and downsides of being a co-signer so you can make an informed decision. I’ll cover
- What does it mean to co-sign a loan?
- The top 5 risks of co-signing
- Real-life horror stories of co-signing gone wrong
- Tips for protecting yourself if you do co-sign
- Alternatives to co-signing a loan
- FAQs about co-signing risks
My goal is to outline the potentially scary realities of co-signing so you can avoid getting yourself into a difficult situation. Let’s get started!
What Does it Mean to Co-Sign a Loan?
When you co-sign a loan, you sign an agreement with the primary borrower to become equally responsible for repaying the debt. Your credit will be impacted by the loan the same as if you took it out yourself.
You may need to co-sign if the primary borrower has poor credit or lacks sufficient income to qualify for the loan alone. By adding your name, you give the lender more security.
But it also puts your finances on the hook if the other person can’t pay.
The Top 5 Dangers of Co-Signing a Loan
Co-signing may seem like no big deal, but it carries significant risks including:
1. Damage to your credit score – If the primary borrower misses payments, it hurts both your credit. Late payments remain on your credit report for 7 years.
2. Collection calls and creditor harassment – Lenders can come after you for missed payments. You may get frequent calls from collectors demanding repayment.
3. Being sued for the debt – Creditors can take legal action and sue you for the full outstanding loan balance. And they will win in court.
4. Seizure of assets – Your wages, tax refunds, or property could be seized to pay off the loan if you’re sued for the debt.
5. Strained relationships – Family or friendship problems often arise when co-signing obligations aren’t met.
As you can see, the risks are severe. Co-signing is not just a friendly gesture – it’s a legally binding financial obligation.
Cautionary Tales of Co-Signing Gone Wrong
To drive home just how bad things can get, here are two real-life examples of co-signing disasters:
Rita’s story:
I co-signed a $15,000 auto loan for my irresponsible younger brother. He promised to make the payments but stopped after 2 months. The missed payments wrecked my previously perfect credit score, which I needed for an upcoming mortgage application. No matter how much I hounded my brother, he wouldn’t pay. I finally had to tap my emergency savings to bring the loan current and save my own credit. My brother and I didn’t speak for over a year and still have a strained relationship.
Gary’s story:
In an effort to help my girlfriend lease a new apartment after her divorce, I agreed to co-sign the 12-month lease agreement. After just 5 months, she unexpectedly moved out of state for a new job. She said she was sorry but couldn’t pay rent for an apartment she wasn’t living in anymore. As the co-signer, I was legally responsible for the remaining 7 months of high rent payments. It destroyed my financial plans for the year and lead to constant harassment from the rental company.
Tips to Protect Yourself if Co-Signing
If you decide to take the risk and co-sign, here are some precautions to take:
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Ask to be removed from the loan once the primary borrower has established good credit.
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Get added as a co-owner on the borrowed asset (car, property) so you have some protection.
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Require the borrower to make you an authorized user on their credit cards so you can monitor activity.
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Have the borrower sign a promissory note agreeing to repay and spelling out the terms.
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Ask the lender about options if the borrower defaults – could you take over payments without hurting your credit?
Alternatives to Co-Signing
Instead of putting your finances in jeopardy by co-signing, consider safer ways to help like:
- Lending money directly to the person in need
- Making the loan payments yourself without co-signing
- Helping the borrower improve their credit
- Using your assets as collateral instead of co-signing
- Being a guarantor who can pay off the loan as needed
Or you may decide the risks outweigh the desire to help – and that’s okay too! Just know your options.
Key Takeaways on the Dangers of Co-Signing
Before agreeing to co-sign on a loan, reflect carefully on these risks:
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Co-signing makes you 100% liable for repayment
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Missed payments severely harm your credit and finances
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You lose all control – the borrower’s actions impact you
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Your relationships can suffer irreparable damage
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Creditors can seize your assets or sue you for the full debt
FAQs about Co-Signing Risks
What happens if the primary borrower stops making payments?
You become responsible for the loan and your credit will suffer if you don’t make the missed payments. The lender can pursue legal action against both you and the primary borrower.
Can I get removed from a loan I co-signed?
It depends. You can request to be removed after a period if the borrower has established good credit. But most lenders won’t remove an original co-signer until the loan is fully paid off.
Do I have to pay the full loan amount if I co-signed?
Legally yes – as co-signer you’re equally responsible for the entire debt, not just a portion. Creditors can come after you for the full unpaid loan balance.
Can I be sued if I co-signed a loan?
Yes, creditors can sue you in court for repayment if you co-signed a loan. And they will win a judgment because you’re fully obligated as the co-signer.
What does it mean to co-sign a loan?
A co-signer is a person who agrees to take legal responsibility for someone elses debt. If the primary borrower fails to meet their financial obligations on a loan or lease, the co-signer is held accountable for any missed payments. A co-signed debt will also appear on the co-signers credit reports and can influence their credit scores as if the debt were their own.
When someone co-signs a loan or lease, they undertake a certain level of financial risk. However, they do not gain access to any of the funds or property tied to the co-signed agreement. Thats why co-signers are most frequently family members or close friends who are willing to put their own finances on the line for a loved one.
Pros of co-signing a loan
Generally speaking, its the primary borrower who benefits most when you co-sign a loan. However, its also an opportunity to have a positive impact for a borrower in a tight financial spot.
For example, co-signing a personal loan allows you to help a young friend or family member build a credit history, thus preparing them to qualify for even more new credit later. Similarly, if someone in your family has an impaired credit history or low credit scores, co-signing a loan may help them secure a bigger principal or less expensive loan terms. In this way, co-signers can take satisfaction in helping someone achieve their financial goals.