Any family member or friend with great credit, good standing, and decent income probably is going to at some point be asked to cosign for a loan. Whether its college tuition, your sister wants help purchasing a house. There are endless things to get a loan for. Usually, the cosigner in question feels that maybe if they say no, they aren’t being supportive. However, you are going to be left for the entire loan, no matter what the reason the person defaults. Experts say that there is never, ever a good reason to cosign a loan for anyone.
You’re completely responsible.
When you co-sign, you are promising to pay the loan in the event the borrower cannot. In other words, you agree to be on the hook for someone else’s debt. You are banking on this person to be responsible in repaying this loan. You are also taking on the full responsibility of inheriting the debt should that person become unable to pay or act irresponsibly in repaying the loan. This kind of trust can end badly and have life-altering financial consequences for a co-signer.
Your credit score can plummet.
Cosigning can destroy your credit report. Even if the loan is paid on time, the potential new debt you have taken on will most likely drop your credit scores, because 30% of your score is based on the amount of debt you carry. Co-signing also will increase your debt-to-income ratio, making it harder for you to qualify for loans you may need, such as for a mortgage or a new car. And that’s the best-case scenario. The worst case is when your family member or friend defaults on the loan. For further reading: Understanding the Reasonings & the Risks of Cosigning a Loan.
It can ruin your future financially.
If your friend or family member defaults on the debt, you, as the co-signer, will not only suffer bad credit ramifications, but you also will be obligated to pay the money back.You could end up defaulting, and having your own bank account frozen.
Your relationship certainly will suffer.
Nothing comes between friends or family like borrowed money; it’s a no-win situation. The borrower feels guilty about it. You feel uncomfortable asking the borrower about the loan payments. And that’s when things are going well. If the person for whom you co-signed fails to make good on the debt, your relationship can go south very quickly. See: Is it Really Ever Worth Asking Family to Cosign a Loan? Cosigning is a financial agreement with no upside.
You are enabling bad behavior.
Don’t let your emotions sway you to be a cosigner. Your daughter might be begging to go to the college of her dreams, and needs you to cosign the loan. As much as you love her, it could hurt you if she were unable to pay. And this is highly possible as student loans are often paid well into adult-hood depending on the college. Can you predict what her life will be like from right now for the next twenty years? That should scare you off enough right there. It also hurts her, because if she were to default on her loans, her credit would be destroyed before she even got a chance to build it.
If, for whatever reason, you ultimately agree to be a co-signer on a loan, consider it a gift. Assume that you will be paying for it yourself, and be happy to do it, if that is the case. This way, you’ll be less disappointed if things go badly. So, if you are going to be a cosigner, make sure you can afford it if the borrower can’t pay, and make sure you can also afford to lose the relationship. See: 7 Loans You Should Never Cosign.