Cosigning for a loan with someone is nothing but trouble. Cosigning is asking for trouble in your relationships with your friends, family, and coworkers. A cosigner guarantees a debt, a debt that is not even his or her own, and it potentially stretches a relationship beyond a healthy limit.
It Is Your Debt. When you cosign for someone, that debt is now yours. You vouched for the person. You said that they were going to pay the loan back. If they don’t pay, then you will have to or it will hurt your credit as if it was your very own loan. At that rate, you should have just taken out a loan in your name and given the money to your friend or relative. You may also have to pay late fees or collection costs if the borrow does not pay which will increase your costs and exposure.
Your Credit Score. You credit score is on the line. A cosigned loan is your loan, and it will be reported to the credit bureaus if you or the primary borrower does not make the payments. Your credit score could start to take a hit before you even realize that there is a problem. It is one thing to deserve a ding on your credit score for your own errors, but it is an entirely different animal when your score gets beat up by other people’s late or missed payments. Another thing to consider is your limited ability to get out of the loan and to borrow new funds in your own name. Your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations
Creditor May Go Right After You. Depending on your state, a lender may skip your delinquent relative or friend and go straight after you. Many states do not require a lender to try and recoup a debt from the principle borrower. Instead, they can come directly after the cosigner first. While you might think that this tactic is unfair, it is perfectly legal. And, you could possible find yourself being strong armed into making a payment for a late borrower. That could also lead you down a slippery slope. You will be caught between a rock and a hard place trying to decide to make the payment and save your credit score or try to help your children or friend learn responsibility.
Changing Relationships. Dave Ramsey likes to say on his popular, nationally syndicated radio show that Thanksgiving Dinner does not taste the same when someone owes another member of the family money. There is an implied master versus subservient relationship. He loves to say, “The borrower is slave to the master”. You do not want to have that type of relationship or power over a loved one, friend, or coworker. It changes the dynamic of the bond and not for the better.
You Have Less Rights. Even though your name is on the dotted line, you are not the actual borrower. You may find yourself as the cosigner with less rights than the borrower. For example, lenders may not give you copies of important papers such as the loan contract, a Truth-in-Lending Disclosure Statement, or warranties. You may have to get copies of these documents from the borrower. But, having these documents are important and they protect you and your interest in the loan and collateral.
In a recent survey, the Federal Trade Commission (FTC) reported that 75% of all cosigners have been asked to make payments on loans for the principle borrower. Cosigning is a risky proposition for any parent, friend, coworker, or relative. You should only enter into these agreements as a last resort and after fully weighing your options.