Should You Cosign a Loan?


Cosigning a loan is a lofty decision, one that usually stems from emotional ties. When I was applying for college loans, I turned to my aunt and uncle for support. As an 18-year-old with no credit experience, I needed someone to help me by cosigning my loans. Although I have never missed a payment, I look back now, more than a decade later, with gratitude and guilt that they may have sacrificed their own needs for mine.

While there is no “right” answer to the question of if you should cosign a loan for someone, consider asking yourself how you feel about the following as you make your decision — the answers are critical.

Are They Reliable?

Be honest: how reliable is the person you’re considering cosigning a loan for? Emotional connection doesn’t imply financial responsibility, and it’s important to consider the risks before agreeing to cosign. Think twice if this person is notorious for overspending, paying late or displays other financial red flags.

Will Cosigning Hurt Your Credit?

The red flags I mentioned amount to a single outcome: credit damage. While you won’t be the primary borrower, the other persons actions will have a direct effect on your credit. Consider the debt as your own as you move forward.

How Will Cosigning Affect Your Buying Goals?

Even if the other person pays their loan on time, cosigning could still affect your credit and buying power in the future. For example, suppose your cousin needs a cosigner for a $55,000 personal loan. Your credit score is 765 and you feel inclined to help him out. He is a trustworthy person and pays his bills faithfully. However, it isn’t until you apply for an investment property mortgage that you realize the drawbacks of cosigning. Your cousin’s loan dramatically impacted your debt-to-income (DTI) ratio, a deciding factor some lenders consider when reviewing loan applications. Your application could be denied, causing you to miss an opportunity to enhance your financial portfolio and purchase that property. This isn’t guaranteed to happen, but is a possibility to consider.

Can You Afford The Consequences?

In the case above, your cousin was able to pay his bill and prevent cosigner consequences. Now suppose they are laid off from work and cannot afford to make monthly payments. As the cosigner, the responsibility falls to you. Failing to pay could mean a risk of default, a collection or charge off citation, years of credit damage and even court proceedings. Are you prepared to handle these consequences? Examine your finances carefully to determine the risks of your own credit health before you sign on the dotted line.

Have You Discussed Alternatives?

Vouching for another person’s financial habits can be risky and searching for alternatives might be a better solution for everyone. Offer to review (or help create) their budget and explore other sources of lending or income.

The bottom line: Although many people — myself included — benefit from cosigned loans, it isn’t always the best solution. Weigh your decision carefully and consult a professional before offering support.

Posted in Lending
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