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

11 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!