One of the worst financial mistakes a person can make is cosigning for another person.
Okay, before you think I’m a heartless person, just hear me out.
No matter how well you think you know someone, mixing money and relationships can completely change things. What you may have thought was a wonderful friendship or family relationship may turn into a horror story.
It may seem very innocent – you’re just helping a good friend or relative get a loan. Really, if it was that simple, I’d tell everyone to do it. But, being a cosigner is making a major financial decision that you need to seriously think about before agreeing to.
A cosigner may be needed for different things such as a:
- Mortgage
- Rental home
- Car loan
- Recreational vehicle
And more.
Now, there are situations when cosigning goes smoothly and nothing bad happens. For my first new car, one of my parents cosigned on it. And, nothing bad happened – I paid off the car loan in full and never missed a single payment.
However, before you cosign a mortgage or something else, it is always wise to be 100% positive of what cosigning a loan actually means and how it may affect your relationship with the person getting the loan.
Surprisingly, many people don’t know exactly what happens when they agree to being a cosigner. So many people think that all you’re doing is helping a person get approved, but that’s not just it.
Sorry to break it to you, but the bank, landlord, etc., does not care if the applicant has a friend with a good credit history. There’s more that comes attached to being a cosigner.
As the cosigner, what’s actually happening is that you are taking on the full responsibility of the debt if the original applicant is unable to pay.
According to a survey I found on CreditCards.com, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay.
Other shocking statistics found from this survey included that 28% experienced a credit score drop because the primary borrower failed to pay their loan, and 26% of survey takers found that cosigning hurt their relationship with the person.
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Still thinking about being a cosigner for a friend or family member? Here’s what you need to know before you cosign.
What is a cosigner?
Before we begin, I want to explain exactly what a cosigner is. Like I said, many people don’t really understand what this term means, and that can really bite them in the butt later.
A cosigner is someone who agrees to be on a loan with another person so that they are more likely to be approved. For example, if your friend can only get a car with a cosigner (either due to them having a low credit score, not making enough money, not having a long enough credit history, etc.), then they may ask you to cosign so they can get approved.
However, as a cosigner, you are agreeing to pay off the debt if the original borrower is unable to pay it in the future. So, even if the original borrower doesn’t pay a penny, the cosigner would have to make all of the payments or risk being sued, having credit report damage, and more.
Remember, like I stated above, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay. Before you cosign a loan, you will want to do two things – know you can trust the person you are cosigning for, and know that you can make the payment. You may be certain you won’t be stuck making the payment, but you don’t want to be stuck in a bad financial situation.
Cosigning a loan may prevent you from being approved for future loans.
If you might be buying something soon that will need financing (house, car, etc.), you should think long and hard before you decide to be a cosigner on someone else’s loan.
This is for multiple reasons.
One, if the person doesn’t pay the monthly bills on time, then you may be rejected for a loan in the future. Missed payments can damage your credit score and your credit report.
Two, as a cosigner, you are increasing your debt-to-income ratio. So, even if your friend/family member pays every single bill on time, a lender will still see this as debt. Unfortunately, this may prevent them from approving your loan because they will think you have too much debt on your plate.
Being a cosigner isn’t something you can easily get rid of.
There’s not much you can do to remove yourself from a loan that you cosigned on. If the person isn’t making payments, you are stuck with it for the most part.
To take your name off of the loan, it would have to be refinanced, and there are many horror stories out there where the original borrower refused to refinance because then they wouldn’t be able to force the cosigner to continue to pay the monthly bill.
Plus, there are instances in which refinancing is impossible because of values tanking, the economy changing, and so on. So, while the original borrower may be okay with getting you off of the loan and refinancing, it’s entirely up to the lender.
Cosigning a loan can ruin relationships.
Unfortunately, many cosigning relationships go sour. I have heard many stories where someone cosigned a loan for someone else and then didn’t talk to them for decades because of a falling out of some sort.
I have always been a firm believer that money and relationships do not mix well. If you are going to cosign or lend money to someone, then you should consider it a gift because there is a chance that you will never see that money again.
Cosigning a loan is up to you.
Even though those cosigning horror stories are real cautionary tales, most people don’t believe they would actually happen to them. However, don’t you think those cosigners felt the same way in the beginning?
It’s up to each person to decide if they will cosign, and you should never feel forced. However, I want you to remember that if you cosign, then you should make sure that you can afford to make the monthly payment.
You never know, one day those payments are being made and everything is going well. The original borrower may be a great person, but they may lose their job, have an unexpected expense come up, or something else that prevents them from paying their bills.
Then, what if something happens to you and you can can’t make those payments either? Unfortunately, being unprepared and not really knowing what you are getting into can turn into a disastrous situation.
Cosigning a loan may not always be bad. However, I believe it’s better to realize what the consequences are before going into something that can negatively impact your life. It’s always better to be prepared!
What do you think of cosigning a mortgage or other type of loan? Would you ever do it?
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SC | MissFunctional Money says
August 6, 2018 at 11:15 am100% agree. I can’t really imagine a scenario when I’d be a cosigner — I feel like the only people who would ask for help from us would be close enough with us that we’d likely gift the money and not expect it back. But knock on wood, though, I’ve never had to deal with an awkward ask-for-money situation, and can imagine how delicate that can be! Especially among family members.
Michelle Schroeder-Gardner says
August 6, 2018 at 2:03 pmYes, it’s definitely a delicate issue.
DNN says
August 6, 2018 at 1:15 pmHappy Monday Michelle,
I just woke up not long ago from sleeping over 6 hours after achieving extensive hours of cardio in the early hours of the morning. I achieved 10 miles estimated this morning and was extremely tired and can barely stay awake after getting home. I’m heading out in a few moments to do some food shopping and stock up on some healthy food so I can stay on track with my weight loss transformation. I’m going to double back momentarily to add my humble $0. 02 to this post. I like that you wrote this blog because it had an experience back in 1999 with an old childhood friend I grew up with in Brooklyn I’m no longer friends with because of money issues. Be back soon to add my commentary. Thanks for posting this blog. 🙂
Michelle Schroeder-Gardner says
August 6, 2018 at 2:03 pmWow!
Patrice @ Financial Peacock says
August 6, 2018 at 3:57 pmI can see a parent doing it for a child, but nothing else. No way. I always say that you shouldn’t loan money to a friend that you expect to get back. Co-signing can have so many other negative impacts besides just losing some money.
Michelle Schroeder-Gardner says
August 6, 2018 at 11:53 pmYes, definitely a lot of negative impacts.
Emenike Emmanuel says
August 6, 2018 at 5:20 pmHello Michelle,
I think being a cosigner to someone is a hard decision very many people are not interested to take when they look at their properties and integrity that are at risk.
Personally, if it’s something I will be unable to pay off if the borrower disappears, I will not cosign. And if I finally decide to, it must be clearly written down how he or she is going to spend the money. If it is something that can be insured, we will do that.
Thanks for bringing up a matter like this. It’s worth discussing before best of friends become worst of enemies.
Emenike
Michelle Schroeder-Gardner says
August 6, 2018 at 11:53 pmThank you!
Bre says
August 6, 2018 at 9:09 pmI completely agree! It may not always turn out badly, but the problem is you never know. Sometimes someone with the best intentions runs into unfortunate circumstances or simply doesn’t know how to manage money. Saying no might be hard, but a relationship would see more harm from a damaged credit score. Thanks for sharing!
Michelle Schroeder-Gardner says
August 6, 2018 at 11:54 pmYes, for sure!
Nadia Malik says
August 6, 2018 at 11:50 pmIt is never a good idea to mix money with any relationship let alone friendship. It never ends well.
Michelle Schroeder-Gardner says
August 6, 2018 at 11:54 pmI agree.
Chonce says
August 7, 2018 at 12:36 pmNope, nope, and nope. I’ve heard horror stories, I’ve seen relationships ruined, and I don’t trust others with my finances. Period. Unless their my husband (and even he has stipulations lol), the answer is no. I don’t think saying no makes you a bad person, that means you’re being smart with your own journey.
DNN says
August 7, 2018 at 7:01 pmHey Michelle,
I’m back though I’m late. I ended up taking a complete day off line yesterday spontaneously and drove to Rehoboth Beach to Tanger Outlets to see what was going on and scope out the seafood market scene. So I stopped by more than one seafood market just check out the prices on shrimp and fish. I passed by Lewes on the way back from Rehoboth Beach and meant to connect with your blog on this topic.
Though I never co-sign for a friend or family member a day of my life for a mortgage, I left home back in 1999 to move to South Florida with a former best friend of mine I grew up with back in Brooklyn and thought this was my friend for life. I found out the hard way about how much of a friend this person was shortly after I moved to Broward County, Florida. He met a female in a gas station and married her two months later. Before he met the female and got married, he slowly started leaving me with his half of the rent and bills to pay though the apartment and everything was in his name. I was paying both of our sides of the rent and bills after I asked my parents to send me down some money.
Though I was paying the bills after he left me high and dry and I can’t remember exactly the way things went how long he left me high and dry for, everything was still in his name and his credit was being built up off of the money I was getting to pay rent and bills. He would walk in and out of my apartment “I now declare that my apartment since he left me high and dry though it was still in his name and I was left paying the bills,” while I was at work. Back in the day in South Florida, I worked for a third-party Outsourcing Center call Precision response Corporation where we handled incoming calls from Priceline.com customers. After parting ways with that job, I worked down the block from PRC near Sawgrass Mills mall at another company called Talk.com. that was an online phone service company formerly owned by America Online – AOL. They’re no longer in business. One thing I learned is though I never co-signed for anyone, I will never do it a day in life for a family member nor friends because though I never been in that situation, I never want to feel duped ever again a day in life.
Thanks again for thought-provoking post Michelle. You’re the best! 🙂
Jason Butler says
August 8, 2018 at 8:23 amWhen I was younger, I used to say that I would lend money or cosign for friends. I started living life and seeing what happened when my friends loaned money to people. It wasn’t good. That changed a lot of their relationships. I don’t want that to happen to me, so I’d never loan or cosign money to family or my friends.
The Challenge Book says
August 11, 2018 at 5:30 amI think this is very important issue, and I haven’t seen it being discussed that much on financial blogs/vlogs. Every person should know about the risk of cosigning, because it’s as serious as taking the loan ourselves. Friends and family can be cruel and we should always have limited trust for everyone when it comes to money.
Cheska J says
October 30, 2018 at 8:41 amI don’t know, I more likely wouldn’t do it for the sake that it might ruin the good friendship.
Lydia says
March 8, 2019 at 6:48 pmI definitely agree that this isn’t an issue to take lightly! After much consideration and some hesitation, we recently cosigned for a friend. It’s risky for sure, however we have had multiple conversations with the friend about the situation and even agreed on a “security deposit”.
Although a security deposit wouldn’t cover the cost of the rent for the remainder of the lease (or loan), I think it does show a certain level of commitment.
Thanks for posting about this topic!
Cocoa Rose says
August 7, 2019 at 11:32 amDon’t do it!!!!!! I co-signed for my brother for a student loan and he did not may ANY payments. Luckily the amount is only $5,000 but still. He left me hanging when I received embarrassing calls from the student loan company while at work and told me to explain the situation to them…Never again!