If you are a person who has worked hard to improve and maintain a good credit over the course of your life, there will likely come a time when a less-industrious friend or family member will ask you to cosign for a loan that they are not qualified to receive on their own merits.
Everyone likes to help out their friends and family members from time to time, and cosigning for that loan would probably be a tremendous help to whoever is asking…but you should not agree to do it under any circumstances, and here are five good reasons why:
All the Risk, None of the Reward
By definition, cosigning for a loan means that you are vouching for the person you are cosigning for and are willing to take ownership of the debt if they should happen to default on it.
Read that again. You are willingly signing up to take ownership of your friend or family member’s debt if they don’t make their payments. That means that the act of cosigning for someone means that you are agreeing to assume all of the risk that the bank is getting paid for taking.
At the same time, you are getting absolutely nothing out of the deal, aside from the thanks of the friend or family member who didn’t have good enough credit to get the loan on their own.
Your Debt-to-Income Ratio Will Suffer
On top of taking all of the risk without being compensated, the loan that you are being asked to cosign for will also show up on your personal credit report for as long as it takes your friend or family member to pay it back.
That might all be well and good right now, but that one extra outstanding balance could be all it takes to pull your debt-to-income ratio down enough to hurt you if you decide to apply for a mortgage down the road.
You Can’t Remove Yourself
Another strong reason to avoid ever cosigning for a loan is that you cannot change your mind once you commit yourself by signing on the dotted line.
Once you agree to be the cosigner on any type of loan, the only way to get out of that commitment is to pay the loan off in full. So no matter what changes might happen in your life over the years to come, that loan is going to be a part of your life until you pay it off.
Your Credit Can Be Ruined
Of course, there is also the possibility that the person you cosign for defaults on the loan without you even realizing it. This will have terrible ramifications on your own credit history, including having your name sent to debt collectors.
The internet is filled with thousands of stories of good-intentioned people who cosigned for “less-fortunate” friends, only to see those friends disappoint and default on massive loans, leaving those good-intentioned people holding the bag with a large debt and damaged credit.
Unfortunately, debt collectors don’t bother to distinguish cosigners from the actual debtors when they are looking to collect. That means you are just as accountable for the debt as the person you are cosigning for when the collectors come calling.
It Will Damage Your Relationship
There is also the chance that the person you are cosigning for defaults on the loan, leaving you holding the bag, and then still shows up for Thanksgiving dinner. The only way to prevent that awkward holiday experience on your end is to avoid cosigning in the first place.
No matter how bad the person asking you to cosign says that they need the loan, there is absolutely nothing to gain by cosigning for them. You are almost always better off to take the cash out of your own savings account and hand it over to them. At least then it won’t impact your credit!