10 Reasons It’s a Bad Idea to Co-Sign a Loan

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It might seem like something you could do as a helpful gesture, but allow us to assure you that you do not want to co-sign a loan for anyone. You really do not want to. It is one of the least responsible financial decisions you can make in life, and it’s dangerous. It seems innocuous, but do you understand what it is you are doing when you sign your name on that dotted line? If not, let me explain to you what you are doing. You are saying, essentially, that if your friend/son/daughter/spouse/relative loses his or her job or decides they’re no longer interested in pay off this loan that you will pay it for them. What you’re doing is buying a house/car/student loan and potentially paying for someone else to live in it, drive it or use it to their advantage until they tire of paying for it. And no, not all people are financially irresponsible, but you just never know what could happen. And our plan for your financial future is one we like to think of as better safe than sorry. So what we suggest is that you take the time to think about all the reasons you should not co-sign a loan for anyone and then make it a point to politely decline the offer.

It Could Ruin Your Credit

It should be common sense, but apparently it is not. When you make the decision to co-sign a loan, you are saying that you are happy to pay that balance if the signer does not. This means that you could ruin your credit if you do not take over the payments on a house, car or loan that someone else made the decision not to pay.

It Lowers Your Score

Becoming a co-signer will lower your credit score. It will make it impossible for you to keep the score you have, because you just applied for credit. What this means is that your own credit will suffer, and all for the good of someone else. Is that worth it to you?

There is No Reward

You are taking all the risk helping someone sign for a loan, but you get absolutely not one bit of the reward. Your credit takes a hit, your future loans could be denied and you are asking for trouble in that you might one day be paying for a house someone else owns so you don’t ruin your credit.

You’re First to be Sued

Did you know that if the person for whom you co-sign decides they are no longer going to make the payments on an item that you are responsible for this? And guess what? If the person owed decides to sue, they’re suing you first. They would not have given that loan to the other person without your help in the first place, so they consider you the issue.

Bye-Bye Relationship

If someone stops paying for something and negatively impacts your credit, guess what is going to happen to your relationship? Rest assured that it’s nothing good. You will never hear from this person again, and you probably don’t want to hear from them. Your relationship as you know it is over and it can be something very devastating to you.

The Unexpected

You might trust someone implicitly, but you don’t know what could happen. That person might be the best person in the world, but if he or she loses her job and cannot make payments anymore, there is nothing you can do about that. You just never know when something bad is going to happen that you are not expecting, and that’s what is often such a downfall for all of us.

You Might Not Get Funds You One Day Need

You co-signed a loan for a boyfriend and now you want to buy your first house. Guess what? You might not be able to since you are on his things and liable for those. It means that co-signing might make it impossible for you to get the things you need in your own life, and that’s a big negative that some people completely fail to realize when it comes to using their own financial abilities to help others.

You Can’t Afford It

If you cannot afford to happily take over payments should the other signer default, don’t co-sign a loan. You cannot put yourself into this kind of financial situation at the risk someone else took. It is not your job, it is not fair and it is not something you could or should do. In fact, you should avoid this as often as possible, and you should remember that you have a life of your own and it’s most important to you.

You Might Go Through Debt Forgiveness

If someone does not pay for a loan and they come after you, you might face tax implications. This means that you might find you have to pay money to the IRS on this because it’s now counted as income. You have to be very careful of things like this or you will wind up in a great deal of trouble, and it’s just not worth it to you because someone else wants a car or a new house or something they just cannot afford on their own.

You’re Liable

When someone else decides to stop paying, it’s on you. You know this, though, so allow us to point out something else to you. The person for whom you are co-signing; they are not able to get a loan. So you have to ask yourself two things: Are they young and have no credit and that’s why they don’t qualify, or do they have bad credit or the inability to actually afford something and that’s why they need help? Either way, they can’t afford something so that means you are making it possible for them to put themselves into further debt or financial strain. Is that the kind of gift you want to give to others?

Photo by Sean Gallup/Getty Images

 

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