Why You Should Think Twice Before Co-Signing Any Loan, According to Experts
There are many scenarios in which co-signing a loan might seem like a good idea. For example, maybe one of your children is just starting college and you are thinking about co-signing their student loan. Or, perhaps you have a family member or close friend who wants to take out a mortgage, but their credit is poor.
Both college and homes are prohibitively expensive for some people these days, so it’s understandable that these situations might arise. However, there are a lot of risks that come with co-signing a loan. In fact, the pros almost always outweigh the cons.
Here’s why, according to experts, you should think twice before co-signing a loan.
You Can Be Liable for Late/Missed Payments
The first thing to know about co-signing loans is that you are responsible for payments on the loan. In other words, if the person whose loan you co-sign fails to make payments, you can be held liable. “Unlike credit cards, where the authorized user is not responsible for making payments, a co-signer is,” says Vashon Gonzales, chief operating officer at KAPED.
Gonzales says he is a debt collector and can understand the pros of adding an authorized user to a credit card. But he fails to see how co-signing a loan is a good idea. “With a co-signer, they are signing a mutual agreement that they will bear the full consequences if the borrower does not pay including damage to personal credit, lawsuits, and even liens or repos,” Gonzales says.
You Can Be Harassed by Debt Collectors
You might think that since a loan you co-sign isn’t “your” loan that debt collectors won’t harass you if payments are missed or late. That isn’t the case, experts say.
“If the primary borrower doesn’t pay the loan as agreed, you’re legally liable for the debt,” says Leslie Tayne, founder and head attorney at Tayne Law Group. “Plus, you could get sued or have your wages garnished if the account goes into default.” Unless you are prepared to face consequences on behalf of the primary borrower, you may want to reconsider signing a legal doc with them.
See Our List: 100 Most Influential Money Experts
It Can Hurt Your Credit History
Loans are a form of credit, and as a co-signer, you are responsible for making sure the loan is repaid. “Any missed payments will cause your credit score to plummet,” Tayne says. “In addition, co-signing a loan for someone else could make you ineligible for credit when you need it. That’s because a lender may think that you’re already overextended financially.”
Credit is one of the most common ways most people pay for large purchases. If you intend to finance a new house or car in the near future, it might be best to avoid co-signing a loan. You might even have difficulty opening a new credit card if you co-sign a loan and it becomes a problem. Unless you pay with everything in cash, co-signing a loan can throw your finances into disarray.
Getting out of Co-Signer Responsibility Is Difficult
If all goes well with the loan you co-sign, you will be absolved of the responsibility when the primary borrower finishes repaying the loan. But what if things don’t go so smoothly?
If the loan becomes a problem and you want to escape your co-signer responsibilities before the loan is paid off, it isn’t so easy, Tayne says. “The primary borrower must qualify to refinance the debt into their name only. Since they needed your signature to get approved for the loan, it will likely be some time before they can refinance it.”
It Can Ruin Relationships
Here’s the thing about money: you can always make more of it. But when relationships sour, no amount of money can fix them. If you co-sign a loan for a friend or family member and they don’t repay, you could end up resenting them. Imagine you get sued, have your wages garnished, or both. Experts have seen this ruin relationships, and that might make co-signing a non-starter, even more than the financial risks.
“You might feel pressured to co-sign a loan because you don’t want to create a rift in your relationship,” says Howard Dvorkin, chairman at Debt.com. “Sadly, in three decades as a CPA and financial counselor, I’ve seen co-signing create even bigger rifts. I’ve seen it end those relationships.”
More From GOBankingRates