Risk and Responsibility: Should You Cosign on a Loan?

Source: Thinkstock

Source: Thinkstock

Cosigning on a loan is a big decision, because you will potentially be responsible for someone else’s debt. This decision can affect your credit, because if the other person doesn’t pay their loan, you will be responsible for it, and because of the fact that isn’t being paid it may show up on your report. Cosigning a loan can also affect you when you try to open other credit. However, cosigning a loan can be a great way to help someone else out, especially someone who has never had a loan or has a very limited credit history; this is often the case for children who are first entering the world of borrowing. Helping out a family member in need can be a great way to show support, but before you offer your help, make sure you consider whether or not you are taking a safe financial risk.

Before you cosign on a loan, be sure to consider all the different aspects of cosigning. The first question you should answer is whether or not you are comfortable if you never get paid back for the loan if the other person defaults. Despite the best intentions, the person you are cosigning with may never be able to pay you back. This also means that you need to be comfortable making the loan payments yourself if the other person fails to pay. If you are cosigning for a family member (like your son or daughter) you may be okay with this, but think carefully about whether or not you are truly comfortable if you have to make the payments.

Your answer to this question might change if you are considering cosigning for a friend; if your friend doesn’t pay the loan, will you be comfortable paying it for as long as necessary (and potentially never getting paid back?) If you decide not to pay the loan, your credit score will suffer.

You also need to determine if you can afford to pay the loan. No matter how reliable the other person seems, if they stop paying, you will have to pay. If you can’t afford to pay, you may not want to cosign at all because you could get sued later. If the lender allows you, specify what your own financial obligations will be if the other person defaults, and make sure you include it in the contract. Make sure you have copies of all important paperwork.