5 Reasons Not to Co-Sign on a Loan

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When someone you love asks if you’d cosign a loan for them, it’s an awkward situation. They’ll tell you it’s not going to cost you anything to help them out—just sign your name. Of course they’ll make the payments on time. Well, that’s not what their credit report says. The bank won’t take them on as a risk, so why should you? There are plenty of ways to help a loved one get back on their feet financially, and cosigning a loan for them might not be your best option.

5 You Could Ruin a Relationship

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You may think cosigning on a loan will strengthen your relationship with the primary borrower. If they’re a close family member, you may even feel duty-bound to help out. There are other ways you can help them get back on their financial feet, such as helping them get credit counseling or giving them a smaller amount of money to set up a secured credit card and rebuild their credit. They may be upset initially that you refused to cosign, but they’ll get over it. That little bump is nothing compared to the tension created if they start making payments late or default on the loan, leaving you to pick up the pieces.

4 There’s No Benefit to You

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Ordinarily, you take out a loan because you want to buy something but don’t have the cash to pay for it in full up front. While you’re making payments, and after you’ve paid off the loan, you enjoy the house or car you financed. When you cosign a loan, you’re essentially taking on the burden of a debt, but without enjoying any benefit. At best, the loan is paid in full according to its terms, and your credit is no worse as a result—but that’s only after you’ve dealt with the stress of an additional burden on your shoulders for several years.

3 You Increase Your Debt-to-Income Ratio

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Even if the primary borrower does pay back the loan on time, the full amount of the loan goes on your credit report as your debt. You’ve guaranteed repayment of the loan, so it’s treated as though it’s your obligation without respect to the primary borrower. This negatively impacts your ability to get financing of your own. You may be refused credit simply because you have too much debt, or may be offered much less-favorable terms. And, even if you’re not planning on seeking additional financing in the future, your debt-to-income ratio can restrict your ability to refinance your current obligations.

2 You Risk Your Personal Credit Score

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When you cosign a loan, you’re guaranteeing payback of that loan. If it’s not paid back according to the loan contract’s terms, all those late payments go against your own credit score—and you have no control over it. Most contracts don’t even require the lender to notify the cosigner if a payment is late. After all the work you’ve put into maintaining a healthy credit score, you’re giving someone else the ability to destroy it without your knowledge. The resulting lower score could affect other areas of your financial life, keeping you from getting good interest rates on future loans and increasing the cost of your home and auto insurance.

1 You’ll Probably End Up Paying It Back Yourself

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Sure, the primary borrower may swear they’ll pay the loan back on time—but Federal Trade Commission statistics show as many as 75 percent of borrowers with cosigners don’t pay their debts. It makes sense, given people typically need a cosigner in the first place because they’re already carrying too much debt or have a poor track record with making scheduled payments on time. If they do default, you be on the hook not just for the original loan, but also for any late charges or other fees they’ve managed to accrue—plus interest. And the bank doesn’t have to go after them first: You may get a phone call after the first missed payment.

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