The Dangers of Cosigning for Family or Friends | Richard Banks & Associates, P.C.

Raise your hand if you’ve ever had a family member or friend come to you about cosigning on a loan—chances are, it’s occurred at least once or twice in your lifetime.

While you may be up for agreeing because they are close family or friends in need of help, it’s important to know what you are putting yourself on the hook for by cosigning on a loan.

What Cosigning Entails

Signing your name on the line for someone else is always a risky move, as it means that you will be responsible for the loan if your friend or family member falls through. Yes—you will be on the hook for the debt if he or she becomes unable to pay.

The creditor can—and will—collect late fees and collection costs from you. In some situations, they may even hold you responsible for paying the full amount of the debt up front.

Why You Shouldn’t Cosign for Anyone

The idea of helping out a friend or family member is an admirable one, but it is still something that should be avoided if possible.

Here are some reasons why you should elect not to cosign on a loan:

• Payments on the cosigned account can and will affect you.
• Your level of debt will rise, specifically the debt-to-income ratio.
• You will be on the hook if the person you cosigned for defaults or files for bankruptcy.
• It could prove tough on your relationship with that person if things turn sour.
• Getting your name off a cosigned loan may not be as simple as it was getting on.

How to Protect Yourself if Cosigning a Loan

If you are still considering helping out your loved one who is in need of a cosigner, it is best to do so in the safest and least risk-involved way as possible.

You can ask the creditor to notify you if the person you’ve cosigned for has missed a payment or if the terms of the loan change.

It is also smart to consider these things before becoming a cosigner:

• Can you afford to pay this loan in full? It is possible to face tax consequences from cosigning a loan if the debt is settled.
• Will cosigning on this loan keep you from getting other credit?
• Is the person asking you to cosign someone who has proven to be reliable and trustworthy?
• Are you organized enough to stay on top of your own payments and those of a friend or family member’s?

If you and the person you cosigned have found yourselves in a tough financial situation and are becoming overwhelmed by the loan payments, Richard Banks & Associates, P.C. may be able to help.