Is it Smart to Co-Sign a Loan?

We're flashing back this Friday to something that hits home for many people... being asked to co-sign a loan. If you're trying to decide what to do, read this post to help you make an informed decision.

A lot of people want to help out someone in their lives. They see someone they care about struggling financially and want to lend a helping hand. Compassion is an admirable quality, but when you co-sign for a loan, you’re putting your own financial well being at risk. Even if it’s your son, daughter, girlfriend, boyfriend, or cousin, more often than not it’s a bad idea to co-sign for a loan.

“But what’s the worst that could happen?” The answer: A lot of things. When you co-sign for a loan you’re telling the lender that if the other person doesn’t pay, you’ll make sure the loan gets paid. So what happens a lot is the co-signer that’s left holding the bag. Two common loans that people co-sign for these days are auto loans and student loans, so let’s look at a few examples of what can go wrong when you co-sign for either of these.

Auto Loans

Many of the people I counsel have either co-signed for an auto loan, or if the other individual’s credit is terrible, they take out the loan themselves so the interest is much lower.  In both cases this is not a great idea and I’ll use one of my counseling stories as an example.

Julia's Story

"Julia" comes in and is complaining about her son not paying the auto loan she took out for him. He was paying for several months, but has recently stopped paying the bill. "Julia" cannot afford to pay all of her bills and the added auto loan that she’s now responsible for. She felt bad for him when she took out the loan and he promised that he would never miss a payment. Six months later both her credit and their relationship are being slowly destroyed.

Student Loans

In many cases parents co-sign on student loans and everything works out just fine. The same risks are there when you co-sign for your children, but the parents have already considered the fact that they will probably be helping pay back the loan. My suggestion: never co-sign on a student loan for anyone that is not your child.  It may seem like common sense, but a lot of people can get guilted into co-signing on a loan. Or maybe they just trust the other person will pay the loan themselves. It doesn’t matter how much you trust the other person, the implications of taking on another person’s student loans are huge and absolutely not worth it. Case in point my next example:

Rosa's Story

"Rosa" had a great relationship with her son’s fiancé, "Keri". The son had been dating her for years and she seemed like a trustworthy    person. "Keri" needed money for school and could not get enough in federal loans so she needed to take out a private student loan. Her parents were not in the picture, so the son and "Keri" asked "Rosa" to co-sign on the loan. At first "Rosa" was reluctant, but she trusted "Keri" and wanted to make her son happy so she agreed to co-sign.

A little while later the son’s relationship fell apart and "Keri" stopped paying on the loan. "Rosa" was now stuck with $20,000 in private student loans that were verging on default. Her credit was completely destroyed and she went to the bank to see if she could be taken off of the loan. The bank would not let her be removed from the loan unless the ex-fiancé ("Keri") was to sign off on it - and the chance of that happening was slim to none. So now "Rosa" is stuck with a loan that won't go away even in bankruptcy. She either has to keep paying that bill for many years or risk collections, destroyed credit, and even possible garnishment.

In the end it's up to you whether you choose to tempt fate and co-sign for a loan, but before you do remember the stories of these two women.

So, the short answer to the question, “should I co-sign for a loan?” is no. You need to protect your financial situation first and foremost.

Are you in a situation where you co-signed for a loan and your credit might be in trouble? Give us a call at 888.577.2227 or visit the LSS Financial Counseling website to set up an appointment with a financial counselor. Appointments are free and confidential. Talking with an expert is a great start to when trying to take control of a situation.

Author Landon McKay is Financial Counselor at LSS Financial Counseling.