Why You Should Think Twice Before Cosigning a Loan

Awww your poor sweetheart needs a loan. And they can't get one. They haven't had credit long enough.

The reasons go on why someone you know can't get a loan. And it's fine that you feel the need to help them. Loan officers are quick to put the cosigner option on a loan application.

Cosigners are usually friends or relatives who sign loan papers for someone who's not able to get a loan on their own merit. It sounds like a good idea at first. Sounds like you'll be really helping your daughter or son go to college. You may be helping someone you know purchase a new home. And as long as they pay the loan back everything should be great, right?

Well, the truth is this statistically, cosigners usually end up paying. That's right. Rather than the original borrower finally getting it together and paying their own loan, you, the cosigner will most likely end up paying for the loan.

Who knows what happened. Maybe some other financial circumstances got in the way of the original borrower being able to pay the loan. But whatever happens or whatever will happen, if you agree to cosign someone else's loan, statistically the odds are against you.

Let's say you don't care about this. You believe your relative is responsible. They're just young. They haven't been able to establish good credit yet. And now they are going to college. They need to go to school.

You just know they're going to pick a good major, and the job after college will pay them well. It's true all of this could happen. And the borrower in these circumstances should be able to pay the loan back on time.

However here's what also happens. When you cosign a loan it gets listed on your credit report. Therefore if the borrower pays 30 days late, you'll see it on your credit report. You'll get a negative hit against it. Your credit score will be affected.

So before cosigning a loan make sure you know who your borrower is. Make sure they are responsible. And maybe you should think twice before cosigning in the first place. In the end, you will be grateful you really took the time to think about it. A couple thousand dollars is a lot of money. And if your borrower defaults, your credit could be affected for at least seven years.