One of the most damaging financial mistakes someone can make is cosigning a loan for another person.
Before you judge, please read on.
No matter how much you trust someone, mixing money and relationships often changes the dynamic. A friendship or family bond that once felt secure can quickly become strained when financial obligations go wrong.
Cosigning can seem harmless — you’re just helping a friend or relative get a loan. If it were that simple, I would encourage everyone to help. But cosigning is a major financial commitment and deserves careful consideration before you agree.
A cosigner may be asked for many types of credit, including:
- Mortgage
- Rental agreement
- Car loan
- Recreational vehicle
And other types of loans or leases.
There are cases where cosigning goes smoothly. For example, when I bought my first new car, a parent cosigned and the loan was paid on time with no problems. Still, before you cosign a mortgage or any other loan, you should be completely clear about what cosigning entails and how it can affect your finances and relationships.
Many people misunderstand the role of a cosigner. They assume cosigning merely helps someone get approved, but it carries far greater responsibility.
The lender, landlord, or creditor does not simply rely on the applicant’s connection to someone with good credit — they expect the cosigner to share the obligation. By cosigning, you agree to take on full responsibility for the debt if the primary borrower cannot or does not pay.
According to a survey published on CreditCards.com, 38% of cosigners ended up having to pay some or all of the loan because the primary borrower defaulted. The same survey found that 28% of cosigners experienced a drop in their credit scores due to the primary borrower’s missed payments, and 26% reported that cosigning damaged their relationship with the borrower.
If you are still considering cosigning for a friend or family member, here are key points you must know before you say yes.
What is a cosigner?
A cosigner is someone who signs a loan agreement alongside the primary borrower to increase the likelihood of approval. Lenders accept cosigners when an applicant’s credit score, income, or credit history is insufficient on its own.
However, cosigning means you promise to repay the debt if the primary borrower fails to do so. If the borrower stops paying, the cosigner is legally responsible for the remaining balance and may face collections, lawsuits, and damage to their credit report.
Given that 38% of cosigners in the survey had to cover payments, you should do two things before cosigning: be confident you trust the borrower, and be certain you can afford to make the payments yourself if necessary. You might believe the borrower will always pay, but unexpected events such as job loss or illness can change that.
Cosigning may hurt your chances of qualifying for future credit
If you plan to finance a major purchase soon — such as a home or a car — think carefully before cosigning someone else’s loan.
First, if the borrower misses payments, your credit score and credit report can suffer, reducing your ability to qualify for future loans. Second, even when payments are made on time, cosigning increases your debt-to-income ratio because lenders treat the cosigned debt as your obligation too. That added perceived debt can cause lenders to deny you credit for having “too much” outstanding debt.
Removing yourself as a cosigner is difficult
Once you cosign, there are limited ways to remove your name. Typically a loan can only be cleared through refinancing, which depends on the borrower’s willingness and the lender’s approval. Borrowers may refuse to refinance because it relieves them of dependency on the cosigner, and refinancing may be impossible due to changes in property values, credit markets, or the borrower’s financial situation.
Because removal is uncertain and often out of your control, you should treat cosigning as a long-term commitment unless you have a clear, enforceable plan.
Cosigning can damage relationships
Many cosigning arrangements end in conflict. I’ve heard numerous stories of people who lost contact with friends or family members for years after disagreements over payments. Mixing finances with personal relationships is risky; if you are going to lend money or cosign, consider it a potential gift, because you may never be repaid and the relationship may suffer.
The decision to cosign is yours
Although many cosigning horror stories exist, people often believe it won’t happen to them — until it does. Never feel pressured to cosign. If you decide to proceed, make sure you can afford the payment yourself if circumstances change.
Today the borrower could be reliable, but job loss, health issues, or other unexpected life events can change their ability to pay. Likewise, your own situation might change and leave you unable to cover the obligation.
Cosigning isn’t always disastrous, but you should enter it fully informed about the financial and personal risks. Understand the possible consequences and prepare accordingly to protect your credit and relationships.
What are your thoughts on cosigning a mortgage or other loan? Would you ever do it?