If you’ve ever been asked to cosign a loan you know that there’s a lot to consider before you sign your name to anything. When you cosign a loan you tell a lender that if the other person on the loan fails to pay it back for any reason, you’ll be the one to pay it back.
Many people cosign for a variety of people in their lives- their spouses, their boyfriends, their friends or children. A very common example is a parent cosigning a loan for their child’s education. Unfortunately, there are also a lot of stories of romantic partners cosigning for each other, and someone getting financially burned.
Should you cosign a loan for someone? We think the answer is a pretty clear ‘no.’ If you are considering it, read on for a few reasons we think you shouldn’t take this on.
You’re On The Hook
When you cosign a loan for someone, you’re essentially saying to the bank ‘I know you don’t think this person can pay this back, but I do! In fact, I believe it so much that you can take the money from me if they don’t!”
When you cosign a loan, you accept responsibility of any missed payments. You also probably have a high credit score, which means that if any negative actions happen, your score will suffer. Cosigners are actually more likely to be sued in the case of missed payments. That’s because they have the higher credit score, and so they’re more likely to pay up.
You’re also signing up for someone else to get something that you won’t be using. Say you help your boyfriend out and cosign for a car loan. He’s the one driving the car. Cosigning a loan means you put your money on the line for something that won’t even belong to you.
Money Complicates Relationships
Cosigning on a loan with a friend or family member can mean road bumps for that relationship. How will you feel if they miss a payment? Can you handle watching them spend money on something other than the loan? If they go out for a sushi dinner and post about it on Instagram, are you going to get angry?
When you cosign a loan you have to be prepared for the emotional side of it too. Do you trust this person and do you trust that your relationship won’t be ruined because of money? Money makes everything more complicated, so it’s important to keep a level head when it comes to your finances.
Effect on Your Own Financial Life
Besides actually having to make payments on someone else’s debt, there’s also the length of the loan to consider. If you cosign a loan that has a ten year payback period, you have to be prepared for having this responsibility for the next decade. Consider this carefully. Cosigning a loan at 22 can impact your credit score and report when you want to apply for your own mortgage at 28.
If you sign a loan for a romantic partner, what happens when you break up? In the eyes of the law and the bank, you’re still on the hook for that loan. Do you want to spend time chasing down an ex to get your name off the loan?
We think it’s never a good idea to cosign a loan for someone else. If you do want to do it, take the time to see if the lender will include a release policy in the paperwork. This will act as an ‘escape hatch’ if you need to get off the loan one day.
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