Why Cosigning a Loan Is a Bad Idea

Would you buy a house in which you couldn’t live? Would you buy a car you couldn’t drive? Would you purchase a boat you’ll likely never set foot upon? Well, this is exactly what you do when you agree to cosign a loan. Essentially, you assume all of the risk, but experience none of the reward, and this is just one of the reasons why cosigning a loan is a bad idea.

There’s a Reason They Need a Cosigner

Odds are anyone asking you to cosign a loan has either bad credit, or no credit. Either way it doesn’t bode well for how they will conduct themselves once they have what they want. If they have bad credit, there’s no reason for you to believe they will suddenly change their ways because you helped them get something else they couldn’t afford. If they have no credit, you aren’t really helping them by allowing them to leapfrog the process of establishing good credit on their own—which would give them a true appreciation of what having it means.

You’re Completely Liable

If the person for whom you cosigned fails to hold up their end, the lender will come after you first. Why? Because they KNOW you’re the one most likely to pay. You were the one with good credit and you are the one with the most to lose. Rather than chase some deadbeat halfway around the world, they’ll come after the easiest one to find— the one with roots and stability—you. And, you’ll be on the hook for the remainder of the principal, the interest and all of the fees that accrued while that person dug the hole deeper and deeper and deeper—probably without you even being aware they were doing so.

No Financial Benefit—But Lots of Risk

You already have good credit, that’s why your name is enough for the lender to go ahead with the deal. Your score isn’t going to get better because you cosigned the loan, but it can definitely get worse if they default. The loan will be listed on your credit report, as will late payments and collections activity. You could find yourself in a situation in which your wages are garnished. And yes, all of this could potentially prevent you from getting a house, a car, insurance and even a job.

Everyone Will Be Happy—at First

The day they drive away in that new car will be a glorious one for everybody involved. They’ll be happy because they got a new car. You’ll feel good because you helped someone in need. The lender will be happy because they stand to make a tidy profit on the loan. Then the “buyer” hits a rough patch and can’t make the payment. After a while, they realize they have nothing to lose and stop paying altogether. The loan goes into default and the lender comes after you. You call the “buyer” and get no answer, just as the collection agency has experienced for the past three months. Faced with paying off the loan, the interest and the fees, you’re now upset, and that relationship is ruined forever.

It just isn’t worth it.

Do This Instead

Whatever the situation, if you feel compelled to help, look for a way to do so that won’t put your good name at risk. If someone comes to you in need of a cosigner to get a car, help them buy an inexpensive one for cash they can drive back and forth to work while they build up their own credit. If they need a place to live, put them up for a while until they can get their own place. If debt is their problem, help them find a solution such as those provided by a company like Freedom Debt Relief to get their financial house in order.

And, it really doesn’t matter who’s asking; your child, your grandchild, a spouse, your parents, your best friend—whoever. For all of the reasons above and so many more, cosigning a loan is simply a bad idea. It might seem cold, but the consequences could be even colder. Don’t do it.