Co-Signing a Loan: Pros and Cons

Recently, someone told me that she cosigned a loan for another person, and now the primary borrower isn’t paying any of the monthly installments. This lady got called by the bank and was told that the primary borrower hasn't paid their bill for the last six months. She then tried to find out what is happening but the person has been avoiding their calls.


This is why cosigning a loan is a bad idea however way you want to look at it. I remember also reading of this woman who helped her lawyer boyfriend cosign a loan for an expensive car only to have the creditors chase after her because they can't get hold of her ex.

I have never read or heard of a story where a person cosigned a loan and it didn't go badly. It's always a disaster and I keep wondering why people do it. From what I can  gather from the stories, cosigning a loan is one of the most riskiest financial decisions you can make. Basically, when you cosign a loan you're saying to the lender if the primary borrower doesn't pay up you will take care of the debt.

What a burden to carry. Think about it. You are not living in the car or the house or getting any benefits from this loan and yet you are hundred percent liable for it. This is crazy.

I know some of you did it because you thought you were helping out a friend or loved one, but there is a reason why the lender said NO to them.  And yes, there are many different reasons why people need others to cosign their loans. It may be that they have bad credit because of mismanaging their funds. It may be that they have too much debt or that their income really isn't enough to cover the loan in the estimation of the bank. Or it may simply be that they don't have credit at all.

That's why before you eagerly agree to cosign a loan, seriously consider the risks and benefits to determine whether it’s a good idea.

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1. It Messes Up Relationships
I have always been a firm believer that money and relationships do not mix very well. While your gesture to cosign a loan might seem like a good idea, this will change your relationship.  Think about it. If you become this person's primary creditor when they default, which generally happens with most cosigned loans, this ruin your relationship. Before you do something you will regret, tread carefully especially if you are willing to mix finances and relationships.

2. It's Risky
Cosigning a loan makes you liable to pay for the entire balance should the guilty party fail to pay. When the primary borrower defaults, you're on the hook, not just for the loan, but for any late charges or collection fees that may have accrued. The late payment will be reported on your credit report like all your other accounts. And, unfortunately, most lenders are not interested in having you pay half of the loan. Which means that you’ll have to work it out with the other primary borrower or get stuck paying off the entire balance.

3. The Lender Can Sue You
They lenders have total discretion as to who they want to collect from. While you might think that the collections department exhausts every possible effort to make them pay, they can still come after you. Think about it.  Yes you may not be the primary borrower but by cosigning a loan, you enabled the person who defaulted to get the loan in the first place.  And when they're doing their calculations, who are they going to go after? Your cousin who earns low income with a lousy credit score, or you with a sterling credit, solid job and a nice wages? See what I mean.

4. You can't exit the contract
Once you cosign a loan, it’s not for a few months, it’s for the entire duration of the existence of the loan — sometimes this is years. Because once you accept this responsibility and sign the loan documents, you’re tied to the debt for as long as it’s owed. You can’t renege or beg the lender to take your name off the loan.  If you decide to co-sign with someone, know that there is a possibility that your name will be attached to the loan until it's paid off.

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Are there benefits to cosigning a loan?
The only positive to cosigning a loan comes from having another loan on your credit history that is paid on time and eventually paid off. This builds up your history and shows you are a safe credit risk.

Cosigning a loan can seem like you’re helping out a loved one who doesn’t quite have the credit rating you do. But is it really? If you are going to do it, just make sure you consider all the risks and only cosign for somebody you trust. And make sure you have clear lines of communication. Just don't put yourself at financial risk to help out someone that can’t get a loan on their own.  Remember, there is a reason the bank said no to them.

So, have you ever cosigned a loan? How did it work out? And if you ever asked somebody to cosign a loan and they refused, how did that work out?