Co-signing: Risks You Should Consider

You’re not likely going to get through life without being approached for some financial help at some point or another. Moms and Dads especially face challenges with their newly-adult children and the money struggles they tend to go through before really settling. If you’re a parent in this financial climate, the chances are pretty high that you’re going to be asked at some point or another by your children, to co-sign for some form of credit. It could be a car loan, a consolidation loan, or maybe just an unsecured line of credit. Whatever the product is, and no matter the reason, you should always take the following things into consideration:

Are you actually helping the person you are cosigning for?

Perhaps the person you are trying to help has spent his or her life spending money irresponsibly and getting into debt, only to have people bail them out of trouble over and over again. Are you enabling bad money habits by co-signing for this person? If you are, you are doing more harm than good. Sometimes, the one thing people need in order to change their bad habits, is to hit the bottom and climb their way back up.

How will it affect your credit, even if all goes as planned?

There are benefits and negatives for this one, even if it all goes as planned. Co-signing a loan is going to increase your debt-to-income ratio as well as your credit usage percentage. When you cosign for a loan, it is viewed as your debt. This debt is visible on your credit report, and, if it increases your debt-to-income ratio enough, can change your credit score. You may have trouble obtaining your own credit in the future because it looks like you already have enough credit to your name. However, if all the payments are made on time, your credit score will improve, due to the positive payment history that has been established in your name too, even if you're not the one making the payments.

How will it affect your credit if things go bad?

Even if the person you’re co-signing for is the most trustworthy, lovable, compassionate and organized person you’ve ever known, you’re still putting your credit score in their hands. All it takes is a couple of late payments and your credit score could suffer. In the worst case scenario, the person you are helping can no longer pay the loan back, and you’re on the hook for making payments in full, on time, every month, until the principal and interest are completely paid off. Will your credit survive that?

It’s not something you can change your mind about after you’ve done it.

Once you’ve co-signed for the loan, you’re on the loan until it’s paid off. There are no takesies backsies with co-signing unless you can talk the borrower into refinancing with their own credit credentials.

How will this affect your relationship?

If something goes wrong with the loan and you end up on the hook for the money, or your credit gets trashed, will your relationship with the person you cosigned for survive that? Are you willing to risk that relationship just to be able to say yes when they ask for help? What would your life look like if you lost your relationship with this person over money?

When considering co-signing for any type of credit for someone you care about, you have to remember that it is not your obligation to say yes. If the person requesting your help is trying to make you feel guilty, that’s on them. You have to protect yourself and your credit, because no one else is going to do it for you. If you don’t feel comfortable facing all the risks listed above, your answer should be a very clear no. Don’t sell yourself out to please someone else.

Have you ever been asked to cosign for a loan? What did you say? Let us know in the comments!