Cosigning A Loan For Friends or Family. Never Say Never?

Most of us have been there. We’re young and want to make a big purchase for a home or automobile but we haven’t established substantial credit to get a loan. Perhaps we’ve damaged our credit and need the backing of a person with a strong credit history in order to get the loan approved. Sometimes the tables are turned and we’re asked to cosign for someone else. No matter the situation, there’s only one issue instance where you should give the go-ahead and cosign.

The issue with cosigning is simple. Banks take a long, hard look at the person asking for a loan. The applicant’s credit score, payment history and income are all looked at to determine if they are acceptable for a loan or if their past has shown them to be just too big of a risk. Banks sometimes don’t have to dig too deep sometimes–if a credit score is below a certain threshold, the rejection is automatic. Rejection isn’t the end of the world though because all an applicant needs is for someone with good credit to cosign and guarantee the payment of the loan.

Banks Want To Loan Money

Let’s face it–banks make their money in part by loaning it out to others. They want to loan you money! When a bank says that they’re going to turn down business because the applicant is unlikely to pay, they’re almost always right! If you’re asked to cosign for someone, you need to take a step back and ask yourself if the applicant really is going to pay. The banks are experts so if you cosign, you are arrogantly putting your relationship with the applicant in jeopardy. Chances are, they won’t pay.

What Happens When You Cosign And The Borrower Doesn’t Pay?

The problem with being a cosigner is that when the borrower doesn’t pay, you will not be notified until it is too late. The banks will go to the borrower first and attempt to collect. Even if the borrower is 30 days past due, you probably won’t get a phone call. After 30 days, both the borrower and cosigner have negative marks on their credit report. How about that! You didn’t even know that you were in jeopardy and your credit score has been negatively affected.

Your relationship with the borrower is going to suffer as well. How will you overlook the fact that you’ve been adversely affected by someone that didn’t keep their promise? There will certainly be animosity there. Entire relationships have been ruined as a result of this. In too many instances, the borrower is far too ashamed to even face the cosigner. The borrower knows that their failure to keep their end of the bargain has hurt the person that trusted them and will not return phone calls or emails.

If You Expect To Pay The Loan Yourself… Cosign

There is only one instance where cosigning is a good idea. If you are planning on paying the loan for the borrower but want to help the borrower develop a credit history, cosigning is a good option. That way, you aren’t surprised when the borrower doesn’t make any payments!

Parents are probably reading this and thinking that it is incorrect–the bond between parents and their offspring is strong enough that cosigning is a good idea. The bank doesn’t think your child is worthy of a loan so why do you? Also ask yourself if damaging the great relationship you have with your children is worth the kid having a new car. If the car is worth more to your son or daughter than your relationship then feel free to cosign. Just bookmark this page so you can come back and tell me how it worked out.

Let’s Hear It. Do You Have A Cosigning Story?

I’m sure cosigning has worked out for a number of people but those people are in the minority. If it didn’t work out for someone, then it wouldn’t be offered as an option. If you have a story of cosigning failing miserably or working out well for both parties then please leave it in the comments section! If you’ve enjoyed this article, please consider Digging It so others can take part in the fun as well. It only takes a click!

Tags: Personal Finance · Relationships

21 Responses From Our Readers

1.) Payday Lender Guru at December 7, 2007 around 4:37 pm

Cosigning on loans is a great alternative to rebuild your credit.

If you’re looking for a company to get a low rate loan through in your area to set up a meeting and discuss your options in cosigning on home mortgage loans, student loans, or even just a simple payday loan I would recommend a lender directory in your area.

Thanks for the informative blog.
2.) SchraderTrader at December 11, 2007 around 1:01 pm

I’ve got student loans that required a cosigner. It’s working our great right now, but I have found it has had a negative impact on my decision making abilities (in terms of career choices). I have been offered a position which entailed high financial risk of failure. It was also one of my dreams but I was unable to go through with it because of the responsibility to my cosigners. If the gig hadn’t worked out and caused me to default or be unable to repay the loans for any length of time, they (family) would be left holding the bag.
3.) Keisha at January 19, 2008 around 4:17 pm

I cosigned for a family member who couldn’t get a car on her own. The worse thing I could have ever done. She signed a 5-year loan. She stopped paying for the car within less than a year left on the loan because she totaled the car. I would never be a cosigner again. Now I may have to assume this loan that I can’t even afford. For anyone who is reading this. Don’t do it!
4.) fariel at February 29, 2008 around 5:30 pm

My husband cosigned for his older brother to get a car. His brother is fifty five, and has bad credit. His other car broke down on him ,and asked my husband to co-sign for him because he needed a car to get to work. When he called our home and asked for the “favor”, of my husband I knew it was the beginning of the end. He and his wife NEVER pay their bills on time. They would rather go on vacations they can’t afford. They seem to have the money for that. I now Know why no one would give him a loan, and creditors are always calling his house. My husband always paids his bills on time…and paid more than the miminum. His brother, on the other hand, has been making the car payments late, over, and over again. When he DOES make the payment, he leaves out the late fee. I am so angry. My husband’s once good credit ,is that he built up all through his life is quickly going down…because of his own brother who he tried to help. I guess no good deed goes unpunished !
5.) April at May 2, 2008 around 6:44 pm

Fariel,

At least your brother is making payments. It’s only been one year with my cosigning nightmare. I swear if I could go back and do it again I would have NEVER NEVER NEVER NEVER NEVER did it.

In a matter of months the car was almost repossessed. It’s about to be repossessed again next week if something is not paid on it. Mind you, I paid last month’s note just so the car wouldn’t get taken away. I’m calling a lawyers and credit institutions on Monday to to learn of my options. Right now I’m trying to get control of the car. I can’t afford for that huge dent of car repossession on my credit score. I’d rather grump and pay for it.
6.) Amber at May 21, 2008 around 3:09 pm

I co-signed for my then fiance back in summer of 2005 for a car. I didn’t really understand at the time why not even his own father would not support him in trying to get a car. I trusted him to make all of his payments which he had been making just fine until he joined the navy about 8 months ago. Since then he has been missing payments off and on. We broke up before he joined the navy so this makes the issue even more bitter.

Now I am at a loss. I keep hoping there is something I can do, that I must surely have some rights or options here. I can afford the car payment but I don’t want to pay for a car that is not in my name, I espeically don’t want to pay for a car that belongs to my ex, and that he can’t even drive for 10 months or more out of the year.

I found this site when trying to search for something. Problem is I really don’t even know what to search for. If I don’t have any knowledge before hand and I go to the bank the loan is through to talk, how can I be sure they will actually tell me all my options? what if they know there is something I could do and they don’t tell me just because it would be bad for them or it would mean someone loosing money somehow?

Do NOT co-sign on anything unless you are planning to pay for it in the first place as this article stated.
7.) sue eom at May 29, 2008 around 7:06 am

I have a qestion and my husband cosign the car for his friend about twenty years ago and first time he default his loan i paid for a year and i did talk to bank lawyers i simply can’ t pay for someboby’s irresponsible act and they didn’t bother me for a while until last week I got judgement from federsl credit service to pay four times higher amount If not they will call my husband to caurt and I din’t want to take chances and I did make deal with them and reduced $6000 and I wonder any way to go after my husband evil friend If I can sturt law suit wiyh him any chances i can
. If any body has idea please let me know take
8.) jennifer at June 16, 2008 around 2:02 pm

what about the people that need a cosigner and WOULD pay the loan, not everyone is like that, my situation is the same, my credit is not bad but it’s not perfect and now i need a cosigner but don’t want to ask anyone cause i do want to do it myself. i have a great job and make great money but nobody wants to even look at me unless i have a cosigner. the reality of this, if someone can do for someone else it’s a great favor, you just need to watch who you do it for.
9.) Dena at July 26, 2008 around 10:23 am

My husband just cosigned for a home for his sister for $350,000. I am furious! His sister is about to lose the house she is in because she couldn’t afford it in the first place. So I want to know how my credit and buying power will be affected by this dumb decision? Furthermore, why would someone lend money even with a cosigner to someone who is going to lose the house they are in? I do not feel the real estate person is operating in good faith. She is the daughter in law of my husband’s sister. She sold the first property and is now working this current sale. I am going to call the real estate office to see what can be done about this as I do not want to be encumbered with this debt when she does not pay. My husband insists she will pay but I tried to tell him he won’t know if she does not pay and each time she pays late, we all will be affected. Any suggestions?
10.) Gilbert Gallardo at August 5, 2008 around 4:49 pm

If i cosign for my brother to buy a House, and I’m also trying to buy a house of my own, how would this affect me?
11.) Lilly at August 11, 2008 around 10:59 am

If I co-sign a loan for my niece for college, will it effect me getting a student loan for my children who are graduating high school in 2010 and 2011 (back to back). My sister promised me she would pay the loan every month, on time. I am extremely close to her. Thanks for your help!
12.) Ryan at September 21, 2008 around 8:04 pm

I have a friend who wants me to co-sign on a mortgage for him. The place he is looking at costs $350,000 and he will pay $200,000 up front, but needs a mortgage for the remianing $150,000. He is willing to lend me $50,000 at a 1% interest rate for the life of the loan, $500.00 total in interest. I have debating whether or not to do it because he is a student, but he has great credit and will already be paying around 60% of the mortgage up front. My wife and I are looking for a place as well and he knows that until we find a place a get a mortgage of our own, we wouldn’t co-sign anything to not jeopardize the amount of money we can borrow. Is it dumb of me to think that it will be ok to co-sign a loan for this person? Please advise. Thanks.
13.) Kallin at March 17, 2009 around 1:18 pm

Several years after my husband agreed to be a co-signer on his son’s auto loan, he and his wife divorced. The son made the payments until the divorce was final. At the time the son defaulted on the loan he was single, working and 25 years old (so not a “kid” and certainly able to pay his debt for the car he was driving)! The “EX” and the son moved out of state and the son stopped paying the car note and(we believe - on purpose)never notified his father that he wasn’t paying. The only reason we knew the loan was defaulted on was that my husband had the $ for the loan amount taken directly out of his credit union account and (after two months of non-payment) the credit union deducted the owed amount from my husband’s account, + late payments, + penalty fees. My husband tried to work out the situation with his grown son (who refused to speak with him) and also with the credit union who held the loan - who also refused to speak with him except to demand the money they were owed because he was the ‘co-signer’ and the ’signer’ wasn’t paying. My husband immediately closed the credit union account and refused to pay for a car he did not have. Several months passed and the credit union notified us that they had reposessed the auto and, “surprise,”…were CHARGING US for all fees to go out of state to recover the auto and then notified us that the car would be auctioned in…two days! The car was auctioned at less than the value for payment on the loan and within two months we were sued for the difference of the balance at auction, plus all fees for repossession of the vehicle, plus - all court costs that the credit union expends to wipe this issue off their books. We have answered the court by saying that we feel we do not owe the debt but legally - it will be a tough fight to win as my husband’s signature is on the loan for the vehicle. Most likely, it will be added to our bankruptcy case and the debt will be charged off. But the advice here is : NEVER, EVER CO-SIGN FOR A LOAN FOR ANYONE … It would be cheaper for you to give them cash and never have it repaid to you than to co-sign for a loan and not only be on the hook for the loan but for all of the fees, etc. that come along with the default on the contract! Live and Learn!
14.) Paula at July 10, 2009 around 5:46 pm

I we co-signed for our niece - rather my wife did - sigh - never again - don’t do it - wish I’d seen this website then. She lies about what she pays - wellsfargo is calling all the time - i’m glad they do cuz it keeps her on her toes- but they are rude - in my opinion -
15.) Zoe at July 24, 2009 around 4:24 am

I have a friend who wants me to co-sign on a mortgage for him. The place he is looking at costs $600,000 and he will pay $200,000 up front, but needs a mortgage for the remianing $400,000. I have debating whether or not to do it because he is a student, but he has great credit and will already be paying around 40% of the mortgage up front. My wife and I are looking for a place as well and he knows that until we find a place a get a mortgage of our own, we wouldn’t co-sign anything to not jeopardize the amount of money we can borrow. Is it dumb of me to think that it will be ok to co-sign a loan for this person? Please advise. Thanks.
16.) chris at September 1, 2009 around 10:44 am

i agree with jennifer…not EVERYONE with bad credit is going to default on a loan that is cosigned for them.i mean look at it like this, if they were able to pay off their debts their credit would be good. if they get a loan they can pay everything off and will have no problem paying off the loan.i swear some people are so heartless these days.maybe one day when you need help noone will be there for you
17.) Mildred at December 6, 2009 around 11:00 pm

My son went into the army right after highschool, always paid his bills on time, and even had some money stashed in a savings account. Until,,he met and married this girl. Every credit card went unpaid, cellphone companies after them, and they cant get a place to live because of his credit. Last year he came to me because he needed me to cosign on a car so that his “wife’ would have a way back and forth to work. I knew in my head I should have said no, but wanting to repair a damaged relationship between he and I because this woman, I did it. 6 months later, they started falling behind, now for a year I have been making the monthly payments so that my credit wont fail. So here is my take on it, IF A PERSON HAS BAD CREDIT, THERE IS A REASON FOR IT THEY DONT PAY THEIR BILLS. Now I never hear from him at all, the relationship is worse off than if I had said no in the first place. Smartest thing I did was get the title in my name only, so tomorrow I will be looking for a repo man to pick, the car up maybe I can sell it and recover a little of the costs. So for the person up above that wants to call people heartless, I had bad credit one time myself, I never asked for help of a cosigner, it took me ten years to get the credit I have now only to be trashed by someone else. Heartless??
18.) Tonya at February 17, 2010 around 2:41 pm

Yep I got burned. I co-signed for student loans for a family member and now we are in collections to repay it. The part of the article about being notified too late is so correct. It appears to have been a lack of “reading the fine print” on the loan and Wachovia’s employees not doing what they probably were hired to do. We were under the impression that the loan was still in deferment since the student was/is still a student. But each time we called to get it rectified they said once they received information from the school it would be back in deferment. Unfortunately, that wasn’t true. Within 3 months of each call we would once again get a bill, after about the 3rd deferment papers were sent, we were told that the loan was only for a certain amount of years and that even though she is still in school the loan was due for repayment, of course by that time we said ok lets start making payments it was too late. They had already discharged the loan as unpaid. For 4-5 months we were going back and forth trying to send payment and then we got the letter that Wells Fargo bought Wachovia and now the loan is with them. By then we were so far past due it was in Wachovia’s collections department. We are paying now but until the entire loan is paid off, its a negative mark on my credit and the students but its affecting me more cause now I CANT GET A LOAN TO GO BACK TO SCHOOL. The student is still in school now getting financial aid (she has kids) and I can’t get anything so im stuck. The worse of it all is that there are two more loans that I cosigned for that are coming up for repayment in the next 2yrs. So unless she graduates and gets a new job and can pay her own loans, My educational advancement is OVER.
WORD OF ADVICE: DO NOT CO-SIGN FOR ANYONE NO MATTER HOW TRUSTWORTHY THEY APPEAR! THINGS HAPPEN EITHER BY BAD CHOICES OR BAD LUCK BUT YOU WILL GET STUCK WITH THIS LOAN. TAKE HEED TO THIS ARTICLE: IF YOU PLAN ON PAYING ANYWAY, COSIGN, IF NOT DON’T!
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20.) Cheryl at June 17, 2010 around 10:53 pm

A different twist..my brother co-signed for 1% of their mortgage, now has moved home and is a deadbeat. They want him out but he keeps holding it over their heads. What is he entitled to?
21.) lisa at July 23, 2010 around 11:57 am

My husband co-signed on a loan for his brother years ago, and assumed he was paying the bill, when we went to purchase our home we discovered he was not. We are now working very hard to pay off his credit card, all the while trying to pay off our own. The best part is that he is unemployed and sits at home all day. If a person cannot get their own loan there is a reason. If a bank won’t lend someone the money, then why should you?