Is It A Good Idea To Co-Sign A Loan?

If you co-sign a loan for a friend or family, you may have helped that friend or family member buy a house or car, get much-needed cash, or save enough money to go to college. However, if the co-signing agreement fails, you risk damaging your credit as well as your relationship with the borrower.

Your spouse, kid, or friend may ask you to co-sign a loan, especially if your credit score is higher than theirs.

However, what appears to be a noble act — such as assisting someone in obtaining funds for a new home or college tuition — might have unintended repercussions.

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What Does it Mean to Co-Sign A Loan?

You are legally bound to repay a loan in full if you co-sign it. Serving as a character reference for someone else is not the same as co-signing a loan. When you co-sign a loan, you guarantee that you will pay it back.

It implies you’ll have to pay back any payments you’ve missed right away. If the borrower defaults on the loan, the creditor can use the same collection measures against you that they can use against the borrower, such as requiring you to repay the whole amount yourself, filing a lawsuit against you, and garnishing your earnings or bank accounts following a verdict. Late payments or defaults may have an influence on your credit score(s).

Co-signing an auto loan does not give you ownership of the vehicle; it simply implies you have consented to become liable for the loan’s repayment. As a result, make sure you can afford to repay the obligation if the borrower is unable to do so.

Prior to signing the agreement, you should obtain a separate notice from the lender as a co-signer. The following information will be included in the notice:

  • This loan is being requested of you as a guarantee. Before you act, consider your options. You will have to pay the loan if the borrower does not. Make certain that you can afford to pay if necessary and that you want to take on this obligation.
  • If the borrower does not pay, you may be required to pay the full amount of the loan. There’s a chance you’ll have to pay late fines or collection costs, which will raise the total.
  • This loan can be collected from you without the creditor first attempting to collect from the borrower. The creditor can pursue you using the same collection procedures as the borrower, such as filing a lawsuit, garnishing your earnings, and so on. If this loan ever defaults, the fact may become part of your record.

Because you have taken on the responsibility to repay the loan, co-signing a loan may hinder your capacity to secure loans for yourself.

When a lender does not want to accept the complete risk of lending money to a particular borrower, they will ask for a co-signer. Read the loan terms carefully and decide whether you want to incur the risk of co-signing.

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Risks Of Accepting To Co-sign A Loan

Co-Sign A Loan

There’s a lot on the line if you’re considering co-signing a personal loan. “The reality is that if the lender believed the original debtor could repay the loan on their own, they wouldn’t require a co-signer. Financial institutions have decades of data and knowledge to help them predict whether or not a borrower would be able to repay a loan on their own. If they won’t grant the person a loan without a co-signer, you shouldn’t be the one who agrees to co-sign.

Here are reasons why co-signing a loan should be avoided at all costs.

1. You’re responsible for the entire loant.

When you co-sign a loan, you agree to pay the entire debt if the principal borrower defaults. Most lenders, regrettably, are not interested in having you pay half of the loan back. This means you’ll either have to work something out with the primary borrower or you’ll be stuck paying the entire debt.

When you sign a loan, it’s not for a few months; it’s for the duration of the loan’s existence, which can be years.”

2. Co-signing a loan entails a high level of risk and a low level of reward.

Even if you co-sign on a loan for a car you don’t drive or a mortgage for a house you don’t live in, you’re still liable if the principal borrower defaults on payments. The monthly payments have a minor impact on your credit score.

You don’t necessarily need more credit lines because you qualify as a co-signer due to your good credit.

3. To keep track of the payments, you must be well-organized.

Even if you trust the individual you co-signed for, you should maintain track of monthly payments if you co-sign a loan. Your credit will have already been harmed if you wait to receive a call from a bill collector reminding you of missing payments.

Set up a monthly check-in with the borrower if necessary to ensure there are no red flags looming that could lead to their being unable to make payments.

4. If you do not make payments, the lender will sue you first.

The lender will come after you first if the initial applicant defaults on their personal loan. After all, the major applicant is unlikely to have a lot of money or assets. They wouldn’t have needed a co-signer in the first place if they did.

In addition to the financial hardship, this situation may put a strain on your relationship with the person for whom you co-signed. Constantly checking to see if the other party has paid can strain a friendship, and as the co-signer, your desire to avoid any bad consequences could be misconstrued as mistrust.

5. If the debt is “settled” and not paid as scheduled, you could face tax consequences

If the lender doesn’t want to go through the trouble of filing a lawsuit against you, it may agree to settle the debt. As a result, you may be liable for the difference in taxes. If you owe $10,000 and settle for $4,000, you may be required to record the remaining $6,000 as “debt forgiveness income” on your taxes.

Your credit report will be tarnished if you settle on the debt. The account states “settled” rather than “paid as agreed.” Because of that new mark, your credit score drops.

6. Co-signing could prevent you from getting a loan

Consider what loans you could need in the future before co-signing a loan. Even if a loan you co-sign is not in your name, it will appear on your credit record because it is a legally binding liability.

As a result, if you request another loan in your own name, you may be turned down due to the amount of credit you have in your name.

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How To Protect Yourself When You Co-sign A Loan

  • Obtain a formal agreement from the lender stating that you will not be obligated to pay until the borrower defaults on the payment.
  • Have a contract in place that limits your co-liability to the unpaid principal and the amount owed at the time of default, no more, no less.
  • Once the loan has been accepted, it’s also a good idea to keep an eye on your friend or relative’s payment obligations. You have given your faith and signed a document, so you can ask the lender to take some safety procedures on your behalf. For example, the borrower should notify you if there has been a late payment or if one is imminent.
  • Consult an attorney before signing and if the debtor becomes reckless. The obligation of a co-signor varies by state.
  • While there are techniques to safeguard your credit history, they require time, money, and a great deal of patience. If you only wish to pay the other person’s loan to protect your credit rating, you can negotiate for the original borrower to pay you directly under distinct, legal terms.
  • Refuse requests from coworkers you don’t know well or who aren’t very close to you but are giving some “incentives” such as a portion of the loan proceeds on a personal arrangement. This will be beneficial to you, your money, and your family.
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Alternatives to Co-signing

If you can’t locate a suitable co-signer or don’t want to take the risk of co-signing, there are a few options that can help you acquire the money you need:

Build your credit: Poor credit is the most common reason applicants are denied loans. Put your application on hold while you try to improve your credit score to the point where lenders will consider you for a loan. Paying payments on time, paying off credit card balances in full, and paying more than the minimum monthly payment can all help you establish credit.

Offer collateral: In exchange for your loan, certain lenders may accept collateral. Consider using your home or vehicle as collateral if you’re willing to take the risk. Keep in mind that if you default on your loan, you will lose your collateral, putting you in significant financial difficulties.

Look for lenders who will work with people with poor credit: If you’re having problems applying for a loan elsewhere, lenders who specialize in personal loans for those with negative credit could be the best option. Although the APRs may be in the double digits, these lenders are more reliable than payday lenders.


Does cosigning a loan hurt my credit?

Being a co-signer itself does not affect your credit score. Your score may, however, be negatively affected if the main account holder misses payments.

What’s bad about Cosigning?

It could limit borrowing power. 

Who gets the credit on a cosigned loan?

The cosigner is responsible for paying back the loan if the primary signer stops paying or is unable to pay. And then the loan becomes part of the co-signer’s credit history.

What credit score does a cosigner need?

700 or above

Can you get denied with a cosigner?

Yes, Even if you do have a cosigner, you could be denied.


If you’re having problems qualifying for a loan on your own, seeking the help of a co-signer can be a good idea. Have an open and honest conversation with your co-signer regarding the loan amount, terms, and payback schedule before accepting the loan offer. It’s less likely that your relationship will be jeopardized if you have contingencies in place.

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