What Are The Risks of Co-Signing A Loan?

Co-signing a loan is a dangerous thing. Too many people end up in bankruptcy due to debts they just co-signed for, so here are a few points worth considering before co-signing for a friend or family member.

1. There is a reason they need a co-signor. A professional lender does not think they will pay the money back. An objective professional (or underwriting standards) arrived at this judgment. Why do you think you know differently?
2. If they do not pay or miss payments, it will affect your credit.
3. The fact that the debt exists and you are liable for it, in itself, will affect your credit and will limit the amount of other debt you can contract due to your debt/income ratio.
4. The lender can pursue the co-signor in court, getting a judgment and attaching the co-signor’s property. This is a real shocker for most people, and I’ve had many, many conversations with people in some stage of disbelief that they, and not the person who they co-signed for, is getting chased for the debt. However, the truth is that the co-signor is usually better off financially than the primary obligor and, consequently, is a more attractive target for a creditor.
5. Unless you agree otherwise with the lender, you may not even know if the primary obligor misses payments. They may be afraid to tell you while you are accruing mounting interest and late fees.

Co-signing a loan is serious business, and you should think about it as taking on the debt itself, rather than just helping someone out because a creditor is being unreasonable. Once you co-sign a loan it is your debt, and you should ask whether can afford it and really want to take on the responsibility.