Will Co-signing on a loan hurt you?
No good deed goes unpunished. That’s the phrase people often think after hearing horror stories about how a good-hearted co-sign ended up in credit catastrophe– or worse. It is true that there are risks in co-signing on a loan, but there can also be some wonderful rewards. The key is to know the good versus the bad ones as well as knowing how to protect yourself while helping out your loved ones. More and more we are seeing people cosigning for their loved ones when documenting income is difficult to for a primary borrower.
If someone does ask you to cosign, take heart. Our society relies on independence so much, that it it is sometimes offensive or humiliating for people who are in need of cosigners. Especially if they never had to before. They should take comfort however that even very successful high net worth people routinely take advantage of cosigner relationships to ensure they are receiving the best terms. Do not cosign for anyone without knowing what you are getting yourself into. Beware of real estate scams that take advantage of people as co-signers. If you decide to cosign, consider it seriously and only do it for people with whom you have very close ties.
“The key is to know the good versus the bad ones as well as knowing how to protect yourself while helping out your loved ones.”
Now, lets talk about some of the benefits and drawbacks of co-signing for someone— this is not an all-encompassing list, just some things to think about:
Benefits of cosigning:
Helping someone qualify to purchase something they may not have been able to do without help (examples: car, house, student loans)
Your own credit may improve as a result of the additional tradeline that has good payment history over time
You may be able to benefit for a joint investment with less upfront risk or cost if you want to buy an investment property with someone you know well and trust
Drawbacks of cosigning:
You become responsible for the debt if the primary borrower can’t or make payments
Your credit can be negatively affected for many years
You may hinder yourself from future credit availability for things you want to buy on credit if it appears you are overburdened with lots of debt
You could have a tax liability if there is a charge-off on the debt due to non-payment
You might end up ruining an otherwise good relationship with someone you care about.
Here are some tips to help you mitigate the risks of the disadvantages of cosigning:
Have a serious conversation with the person you are co-signing for and tell them how much you care about your credit and how it would affect you if payments weren’t made on time
Know the credit history of the person you are co-signing for. Just because your cousin is a wonderful person who you love dearly, doesn’t mean they are good at managing their debts on time.
Ask, the person you are co-signing for to put the payments on an automatic payment schedule so that the chance of missing payments is reduced
Ask for a monthly receipt of the payment to be shared with you so you can keep for your records.
Be smart about who you cosign for– make sure they are a very long term part of your life. While its not always the case, it’s not generally advisable to cosign for friends, romantic partners, and even cousins, whereas cosigning for parents, children, or siblings might be a better fit.
