Why You Should Think Twice Before Co-Signing a Loan

The financial perils of putting your name on the bottom-line for a loved one

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(Image: iStock.com/Ferran Traite Soler)

If you’ve never co-signed a loan for a friend or loved one, chances are that one day you will be asked. Even though you might wish with all your heart to help the person in need achieve their goals, it’s important to also consider your own financial well-being.

A CreditCards.com survey of 2003 U.S. adults revealed what can happen when co-signing a loan gone wrong:

  • Lost money: 38% of co-signers had to pay some or all of the loan or credit card bill, because the primary borrower did not.
  • Credit damage: 28% experienced a drop in their credit score because the person they co-signed for paid late or not at all.
  • Hurt relationships: 26% of respondents said the co-signing experience damaged the relationship with the person they co-signed for.

Overall, the poll found that one in six  U.S. adults say they have co-signed a loan or credit card for someone else. The most common scenario; a co-signer older than 50, helping a child or stepchild by co-signing an auto loan.

“With a 38% chance of losing money and a 26% chance of damaging a relationship, co-signing doesn’t sound like a very good bet,” according to Matt Schulz, CreditCards.com’s Senior Industry Analyst. “If you absolutely have to co-sign, then at least be aware there’s a sizable chance you’ll lose some money and/or get your feelings hurt.”

Experts say in addition to hurt feelings, experts say there can be hurt relationships.

“Co-signing a loan for a family member or friend can go wrong in many ways, so it’s a good idea to really think about the risk factors,” says the Money Coach and author, Lynnette Khalfani-Cox.

“Co-signed loans that go sour can lead to strained relationships—or even destroy close relationships all together. For some people, the risk of this may not be worth it,” she adds.

In addition, Cox adds that it’s important to consider your own finances.

“The first big risk is that, if the main borrower doesn’t repay the loan, you’re on the hook for it financially, and creditors can came after you for the money,” says Cox.

“The second potential hazard is to your credit rating. If you co-sign for any credit or loan, and that obligation is 30 days or more late, it will wind up on your credit report, even though you’re not the primary borrower,” she adds.

Also, keep in mind that if you have a family, the strain on your credit report that could result from  your effort to help your friend get a loan could hurt all of your ability to achieve your own financial goals.



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