Before you sign on the dotted line, read this guide to learn about the realities of co-signing.
A friend or family member needs a loan to pay for tuition, a car, home improvements or some other major expense. The problem is that the banks say “no,” unless they have a co-signer. Before you sign on the dotted line, read this guide to learn about the realities of co-signing.
The Truth About Co-signing
If you co-sign a loan, the reality is that you get absolutely nothing out of it. You'll get the pain of debt but no real upside. Even in the best case scenario, you still end up approximately where you began.
If you think “I will have a better relationship” with your friend or family member after co-signing the loan, remind yourself that truly good friendships will survive no matter if you co-sign. Think about the type of friend that would ask you to take such a great financial risk.
Also remember that the odds of the downside are actually pretty significant. The bank thinks so, otherwise they would give your friend or family member a loan without asking for a co-signer. The bank makes these decisions after scrutinizing one's credit report and history of actually paying back debt. The fact that they have access to this information and won't offer a loan should be pretty telling.
Keep this rule: If your loved one's credit is not good enough for a bank, it should not be good enough for you. Don't take a risk that a lending institution would not.
If your pal or relative cannot or does not pay back the loan, the responsibility is yours to pick up the pieces. If an unforeseen accident or bad business deal happens, the loan is still around your neck – and your neck only.
In the vast majority of cases, the best advice is to not co-sign. It is an enormous financial risk that won't benefit you in the long-run.
When Should You Cosign?
One general exception to the don't-cosign rule is if your child needs a student loan for college. Most parents are willing to accept the weight of cosigning for their children, and most kids don't have credit to get a loan when they are applying to universities.
If you do decide to co-sign, remember that there is still a real risk. If your child defaults, the loan becomes your headache.
The upside of co-signing a student loan is that you can help foster an independent and successful child, and for many parents, that is benefit enough.