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Should You Cosign a Loan?

August 7th 2014 by
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You’re put in a tough spot if you’re asked to cosign a loan. The borrower is in an even tougher spot.

It’s hard to leave emotions out of it, but it’s important to think about what’s being asked of you and how it affects you.

What Does it Mean to Cosign?

As a cosigner, you are agreeing to take full responsibility for the debt if the borrower stops paying. It’s possible the creditor will even attempt to collect the debt from you rather than the borrower.

But just because someone needs a cosigner, doesn’t mean they’re at high risk of missing payments. Usually it just means they don’t have the credit history necessary for the loan. As the cosigner, you provide that added security for the creditor.

What To Think About

  • Can you afford this loan should you have to take full responsibility? Look at your budget and make sure there’s room.
  • Will you be responsible for any late fees or collection costs that may accrue? Ask the creditor for a description of exactly what you’re responsible for.
  • Will you need a loan for yourself in the near future? The cosigned loan will be on your credit report and can block you from getting your own loan. (However, if everything goes smoothly, your credit report can benefit from this in the long run).
  • Will the relationship survive? The borrower will be happy and grateful, but what happens when things go wrong?

Possible Scenarios

If a friend or family member asks for assistance on a big loan – a mortgage or business loan, for example – those are cases where you will be tied to a loan for a long time. The risk is much higher.

However, if the borrower needs a smaller loan for an amount that you may even have in your savings, you’ll be in a better place to support them should it come to that.

Parents will sometimes opt to cosign auto loans for their children. This can help your child establish credit for themselves, but again, comes with a higher risk.

Ultimately, the decision is up to you. It’s hard not to factor emotions into this decision, but try to look at the facts. Review the paperwork, ask questions and understand what you’re getting into before signing.

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