We all like to help our loved ones. It makes sense to what to help those we care about financially. One way that it seems natural to help others is through co-signing on a loan.
On the face of it, co-signing seems like a good idea. Your friend or relative is able to get the financing he or she needs, and you don’t have to front any money. It seems like the perfect way to help.
Unfortunately, co-signing a loan -- even for someone you care about and trust -- isn’t always the best idea. Before you sign on the dotted line, consider the following 3 reasons not to co-sign:
1. You Accept Responsibility for the Debt
When you co-sign a loan, you accept responsibility for the debt. Your signature gives the creditor permission to come after you for payment if the borrower doesn’t meet the terms of the loan.
Carefully consider how much you trust the borrower. Why is he or she having a hard time getting credit? If the borrower has had problems in the past, what makes you think that this time is different, and that he or she will come through on the loan?
Make sure that you are ready to repay the loan if you co-sign, because that’s what it might come down to. If you really, really trust the borrower, it can work out, but you always have to be aware that you could be made responsible for the debt.
2. Your Credit Rating is on the Line
Since you are responsible for the debt, your credit rating is on the line. If the borrower misses payments, this fact is reflected on your credit report, as well as on the borrower’s history. In some cases, a borrower might not tell you that he or she is having trouble making payments. You might not find out until the borrower has missed several payments and the creditor starts contacting you for payment.
Then, if you decide you don’t want to pay since you’re not the actual borrower, your credit could take an even bigger hit. If you want to limit the damage to your credit when the borrower stops making payment, you have no choice but to pay off the debt yourself.
3. You Might be Denied Credit
When you co-sign, it is reported as a credit obligation on your credit report. This means that when a creditor looks you up, it looks as though you already have the debt -- even though, technically, you don’t. This can hinder you as you apply for loans for yourself. If you plan to buy a car or a home in the near future, it doesn’t make sense to co-sign on a loan, especially if it is a fairly large loan. Your generosity could mean that you limit your own opportunities.