I’m a Finance Expert: 4 Financial Risks of Co-Signing Loans
Written by
Lydia Kibet
Edited by
Zuri Anderson
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When your best friend or family member asks you to co-sign a loan, it’s easy to say yes. But what feels like a quick favor turns into a long-term financial burden. Co-signing a loan is more than vouching for someone’s creditworthiness.
GOBankingRates spoke with Ashley Morgan, debt and bankruptcy lawyer and owner at Ashley F. Morgan Law, to discuss the financial risks of co-signing loans.
You’re Responsible for the Entire Loan Amount
A lot of people assume that co-signing means promising to repay the loan when the borrower defaults. However, “when you co-sign a debt, you are responsible for all the payments in the beginning,” Morgan said. “This means if the account is charged or in collections, a creditor can collect the full amount from you.”
Before you sign the dotted line, ensure that you’re in a position to cover the loan payments if anything happens.
It Can Impact Your Credit Score
A co-signed loan appears on your credit report. So, any late or missed payments can negatively impact your credit score.
“If it lowers your credit, then it may make it difficult to qualify for your own loans,” Morgan noted.
It can also impact your debt-to-income ratio — the percentage of your monthly income that goes toward existing debts. If you’re planning to take out a mortgage, buy a car, or even apply for a credit card, lenders might view you as too risky to extend you more credit.
Bankruptcy Won’t Protect You
What if the person you co-signed for files for bankruptcy? You’d assume the debt is wiped clean, right? No, you’re still on the hook.
“If you co-sign for a debt and the other person files for bankruptcy, you’re still responsible for the debt,” Morgan warned. “This means that the original borrower can discharge their obligation on the debt, but yours remains unless you also file for bankruptcy.”
Removing Yourself as a Co-Signer Isn’t Easy
You might think you can remove yourself from the loan later, but it’s not easy.
“Being removed as a co-signer is difficult. It typically requires refinancing the full debt,” Morgan said.
That’s why you shouldn’t treat co-signing as a short-term favor. It’s a long-term financial commitment.
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Source
- Ashley F. Morgan Law, “Ashley F. Morgan Law, PC | Bankruptcy Attorney | Tax Resolution.”
