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Is Cosigning a Personal Loan Wise?

Posted May 12th, 2010
by Staff

One of the most common ways for someone with imperfect credit to be able to get a personal loan is by having a family member or friend cosign. When you cosign a personal loan, you are making a promise to the lender that, if the other borrower doesn’t make the loan payments, you will be held responsible for the loan.

What is Cosigning?

You need to understand, first off, what that really means. If you cosign a personal loan, you’re fiscally responsible for the loan. The bank or lender can come after you with everything at their disposal in order to collect. They can sue you, they could file a lien against your property or they could ask a court to garnish your wages. Depending on where you live, the lender may be able to attempt to collect from you as soon as the borrower is late with even a single payment.

Why Do It

There are plenty of reasons you might be asked to cosign a loan. You might have a child who’s just getting started out in life, and doesn’t have a credit history of his own. You might want to help a younger sibling buy their first car, or you might want to help out a buddy get on his feet after his divorce.

There’s nothing wrong with wanting to help someone financially. And, if you have a choice between giving someone the money outright and cosigning on a loan for them, it is awfully tempting to go the loan route. That way, you may not have to give them all of the money.

Why It’s A Bad Idea

That said, it still may not be the best choice. After all, there’s a reason the banks won’t extend the person credit. If you cosign the loan instead of just giving them money, you may wind up owing the bank more than what the borrower asked for due to interest charges. I’m not saying you need to give away all of your money, just that giving your friend or family member a personal loan may be better than cosigning.

Cosigning can damage your credit. If there’s a court judgment against you, it will damage your credit score, which could disqualify you from other kinds of credit and even raise your insurance rates in some states.

Some studies suggest that in as many as 75 percent of cases the original borrower doesn’t make good on the terms of a cosigned loan. The odds just aren’t in your favor, so if you have another way to help your friend or family member out you should consider it.

Categories: Advice



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