Warning: 7 Things to Consider Before Co-signing on a Loan with Someone Else

In today’s economy, it seems like everyone is looking to buy a house! But maybe you have a friend that can’t quite afford their dream home yet. They could always pay for the down payment themselves and then just hope that they qualify for a mortgage. Maybe they ask you to help them out and co-sign on a loan with them so that they can qualify for a better rate.

This would probably be considered one of the most selfless things you could do, but is it really? What if your friend can’t pay their mortgage and defaults on the loan? You’ll have to take over the entire loan balance, and may risk losing your assets. These responsibilities may be too much for you to handle and not worth loaning money to a friend who has no plans to take care of the loan.

People who are considering co-signing on a loan with a friend should answer these 7 questions first:

1. What responsibilities come along with co-signing?
2. Will your friend be able to pay the loan back on time?
3. If they can’t, what happens to you?
4. Is there a chance that you will lose your home if they can’t pay back the loan?
5. What about your credit score and how it might be affected if they can’t pay back the loan?
6. How does it affect your relationship when you co-sign on a loan?
7. What are the chances that your friend can pay back the loan without you having to do something about it?

If you are able to answer these questions objectively, then perhaps you are ready to consider cosigning, but let’s look into some other areas to think about first.

Can You Take Over the Loan?

What are you potentially signing yourself up for if you agree to co-signing on a loan? Sure, everything can go smoothly and you just helped out a friend, but things get messy as soon as there’s signs of your friend not being able to make loan payments on time.

If they can’t pay it back, you may have to start covering their payments or making them yourself so that they don’t accumulate late fees and penalties. In the unfortunate situation where they skip town or die, you are on the hook for the entire loan balance, and may risk losing your assets. These responsibilities may be too much for you to handle and not worth loaning money to a friend who has no plans to take care of the loan.

Sure, this might be the worst case scenario. However, you have to ask yourself whether you can handle the risk and repercussions if you have to end up taking over the entire loan for your dead-beat friend.

Potential Effects on Your Credit

In the event that you have to assume the loan if your friend can’t pay it back, your credit score might be affected. For example, say you co-sign a $200,000 30 year fixed rate mortgage with a 4% interest rate and your friend dies. You now need to pay off his $200,000 mortgage and your 4% interest rate just went up to 8%. If you can’t afford this new payment, you will lose your home (if you have one).

What if they decide not to pay because they lost their job? Now the loan is in default and it’s going to cost even more than before which could be thousands of dollars in fees and penalties.

How Can this Decision Affect Your Relationship

While you may be thinking that you are doing your friend a big favor, also consider what will happen to your relationship if any complications come up. If you are co-signing with a significant other, then any tensions around financial circumstances may put heavy stress on your relationship. If they can’t pay the loan, you would have to pay and potentially lose your home! Would you rather not test this situation?

This is just the tip of the iceberg when it comes to co-signing on mortgages, car loans or even student loans so think long and hard before doing something that could lead to irreparable damages with those around you.

The Quick Pros and Cons

Here are some more pros and cons for you to ponder:

Pros – The pros are pretty clear. If someone that you know is looking to buy a house, then co-signing on the loan for them will help them out and might benefit you as well. They get into a house that they otherwise couldn’t afford and you don’t have to do any of the work!

Cons – The cons are very clear as well: if your friend defaults on the loan, you have to pay their entire mortgage or lose your home. You also have to worry about your credit score being affected if they can’t pay back the loan. And lastly, if you’re married and co-sign a loan with your significant other, this could lead to severe financial problems in your marriage.

Bottom Line

Don’t do it. If you have gotten through this article, you can probably tell that I have a strong opinion towards never co-signing on a loan for a friend – it’s just not worth it. There are too many things that can go wrong. Unless it is truly a life or death situation (and even then there are other avenues for financing), it simply isn’t prudent to co-sign on a loan without being prepared to completely take over the loan if anything goes wrong.

There are many things to consider when deciding whether or not to co-sign on a loan with someone else. Just because it might be the right thing to do doesn’t mean that you’ll be able to handle all of the responsibilities that come along with it! Can your friend afford the loan without you? And if they can’t, can you afford to assume the loan if they don’t pay it back? Do some more research on what co-signing entails and then make a decision that you can live with.