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Cosigning a Loan for a Friend

 What is Cosigning a Loan?

When you cosign a loan for a friend you are telling the lender that if the person on the loan does not make the payments that you will.  

If your friend does not have good credit there is probably a reason.  They have missed payments in the past.  They are also likely to miss payments in the future.

If they miss a payment on the loan you cosigned it will show up as a missed payment on your credit report and on their credit report.  

You will not be notified that the payment has not been made until it is already late.  Then you will see it on your credit report as a missed payment.  Ouch.

Rick W. and his Daughter

A friend of mine, Rick, cosigned a car loan for his adult daughter (28 years old) and her husband.  His daughter and her husband both work and make good money but have bad credit. 

My friend told them it was important to make the payments on time.   After a while he checked his credit and they had one late payment. 

They lived right next door and did not bother to tell him they were going to miss a payment. 

It lowered his score by 60 points.  He was saving up and trying to build his credit to buy a house. He still has not bought a house.

Never Cosign a loan

 

My recommendation: You will be better off to just give them the money rather than cosign.  If they are an adult and have bad credit, they have a history of not making payments on time. 


If they have had a medical emergency they may have had no choice on missing payments.  However most of the time bad credit is caused by not getting around to making payments on time.


I would Never cosign a loan. 


Instead of Cosigning a Loan for a Friend  

Another option is to borrow the money yourself buy the item and have them pay you back.

 

This way you will be sure the payment gets made and your credit will not take a hit if they miss a payment.


Hazards of Cosigning a Loan



Cosigning a loan can be risky and potentially hazardous for the cosigner. Here are some hazards of cosigning a loan:

  • Responsibility for the loan:
    As a cosigner, you are equally responsible for repaying the loan. If the primary borrower fails to make payments, the lender can pursue the cosigner for the full amount owed.
  • Damage to credit score:
    If the primary borrower misses payments or defaults on the loan, it can negatively impact both the primary borrower's and cosigner's credit score.
  • Legal action:
    If the primary borrower is does not repay the loan, the lender can take legal action against both the primary borrower and cosigner. This could result in wage garnishment, liens on property, or other legal consequences.
  • Limitations on future borrowing:
    Cosigning a loan can affect the cosigner's ability to obtain credit in the future. The cosigned loan will appear on the cosigner's credit report and may impact their debt-to-income ratio, potentially making it harder to qualify for future loans or credit.
  • Strained relationships:
    If the primary borrower fails to make payments, it can put a strain on the relationship between the primary borrower and cosigner. In some cases, cosigning a loan can even lead to damaged relationships or ruined friendships.

Overall, cosigning a loan is a serious financial responsibility that should not be taken lightly. Before cosigning a loan, it's important to carefully consider the risks and potential consequences.
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