Learn About Co-Signing a Loan

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One of the favors that might be asked of you at one point is to co-sign on a loan. Whether your child is asking for help getting his or her first credit card, or whether a friend needs a co-signer for a car loan, you might be asked to help out. Before you co-sign a loan, though, you need to consider the pros and cons associated with taking on this responsibility. For borrowers looking to request a co-signer, it is one way to help get approved so that you can build up your credit.

Understanding the Responsibility of a Co-Signer

Before you co-sign, you should understand what it entails. When you co-sign on a loan, you are pledging yourself to pay on the loan if the borrower doesn't pay. The main advantage to co-signing is that you can help someone else get the credit he or she needs. Co-signing for your child can help him or she get started down the path to good credit. Your signature on the loan provides someone else a chance.

However, you should realize that you will be held responsible if the borrower doesn't pay. When the borrower misses a payment, the creditor can come after you because you agreed to be responsible, in some way, for the loan. For many people, this aspect of co-signing is enough of a downside to avoid it altogether, even if it will help someone out.

Your Trust Level In the Borrower

You have to ask yourself whether or not you trust the borrower. Do you believe that he or she will make on-time payments? If you are helping a friend buy a car so that he or she can get to work, it might seem like a noble cause. However, if this friend has shown a tendency to renege on his or her obligations, you might have to repay the loan. While it may seem cold-hearted to evaluate your child, parent, sibling, or friend for trustworthiness, it might be necessary if you don't want to find yourself paying off someone else's debt.

Consider If Co-Signing on a Loan Could Negatively Impact the Relationship

Additionally, you need to consider the impact co-signing the loan might have on your relationship with the borrower. Will you be constantly nagging the borrower to make sure that he or she fulfills the obligation? What happens if the borrower defaults?

When it is your own child or a parent, it might be easier to get past having to pick up the slack on an unpaid loan. However, when it is a friend or sibling that fails to pay, sticking you with the bill can cause an irreparable breach.

One of the biggest disadvantages to co-signing a loan can be the effect it has on a cherished relationship. If you are concerned about this, it might be better to consider other ways that you might help someone who is in a bind.

Bottom Line

Co-signing on someone else's loan is a big commitment. Before you agree to it, you need to weigh the pros of helping someone get a loan they might need against the cons of possibly getting stuck paying for a debt you didn't incur. It's a tough decision and one that shouldn't be made lightly.