Posted by Alicia Waltenberger.
With credit harder to come by nowadays, the creditworthy among us are made to feel like the popular girl at school. Not only do credit card lenders solicit us with offers; even the (less creditworthy) members of our own family bombard us with special attention—and sweetly suggest that we might cosign on a loan for them.
Eager to lend a hand, too many of us oblige—without really thinking through the risks and potentially negative consequences.
Before signing on any dotted line, it’s crucial to weigh the pros and cons:
- You’re in the privileged position of helping out someone in your family whom you know to be trustworthy, and yet based on their assets (or lack thereof) is simply not eligible to borrow the money they badly need for education expenses, a car to get to a first job—or to tide them over during a time of financial hardship.
- Helping a family member get a first loan will also enable him or her to start building their own credit score, eventually making them eligible to take out a mortgage, or another important loan, solely in their own name.
- Opening another account in your name may also boost your credit score—which may unlock lower interest rates and other benefits.
- Remember that cosigning means you’re taking on their loan, too. That’s a heavy responsibility to shoulder—one that shouldn’t be accepted lightly.
- In some states, lenders will come to you, the primary borrower, to get the money back. Lenders generally go after the person with the financial means to pay, but state laws vary.
- Your credit score will be negatively affected if your family member misses a payment.
- Some people believe that money and friendship don’t mix, but the same may be said for any close relationship.
Placing a financial obligation on a family member might put pressure on the relationship in some way. If you’re cosigning for a partner, you may be putting yourself at more risk, because romantic relationships are not as binding as familial ties. There’s always a risk he or she won’t keep up their end of the bargain. If you’re taking out a mortgage with a partner, you may consider having one party take out the loan, and collect payments from the other party, rather than the potential complications of cosigning.
While cosigning for a loved one can have significant net benefits, the potential downsides shouldn’t be overlooked. Every situation is different, and you’ll ultimately need to take personal factors into account while you consider cosigning.