Co-signing a loan that creates debt for a friend or loved one is risky enough. And when you do it while you’re in debt and have shaky credit — the implications go far beyond a simple signature.
It is crucial to a consumer’s creditworthiness to vouch for the U.S. lending industry, and the ability to borrow may depend on sharing the burden for some. This can be the top of a slippery slope.
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Imagine you’re 36 years old and dream of owning a home, but you have a car that needs regular maintenance. You’re also $30,000 in debt and have a mediocre credit score. A childhood friend calls with a desperate plea: “Can you cosign a personal loan for me?”
The friendship is deep, but so is your guilt. What do you do when their emergency collides with your own vulnerable situation?
For someone with significant debt and less than stellar credit, this decision can lead to financial disaster, becoming a burden that drags you deeper into the hole. Let’s take a look at what co-signing really means, and why you might want to avoid it.
What it means to co-sign
Co-signing isn’t just doing your friend a favor—it’s putting your own financial health at risk. When you co-sign, you become just as responsible for the loan as the primary borrower. If your friend misses payments or defaults altogether, the lender will come after you for the money.
Additionally, the loan will appear on your credit report, which will affect your debt-to-income ratio and potentially lower your credit score, especially if payments are missed or made late. In essence, co-signing is the same as taking out the loan yourself — without the immediate benefits.
Co-signing risks while in debt
If you’re already $30,000 in debt and your credit is average to poor, co-signing a loan can be like playing with fire. Here’s why:
Increased liability: When you’re working through your own debt, it can be overwhelming to have someone else’s financial burden added to the mix. If your friend can’t pay, you’re responsible for covering for them, which can stretch your finances beyond their limits.
Impact on credit score: Co-signing can further damage your score if your friend misses a payment. Missed payments show up on your credit report, making it even harder to improve your financial position.
Effect on creditworthiness: Lenders examine your credit history when evaluating future loans or credit applications. Co-signing can make you appear risky and affect your ability to apply for more credit.
Read more: These 5 Magical Money Moves Will Boost Your Net Worth in 2024 — and You Can Complete Each Step in Minutes. Here's How
The potential benefits of co-signing
Despite the risks, co-signing is not necessarily a bad thing, as long as it is done under the right circumstances.
You can strengthen your relationship by helping a trusted friend in times of need. If they consistently pay on time, it can help them build their credit history while also strengthening your own, and both your credit scores will benefit.
If all goes well, it can give you a little boost if there is another account on your credit report in good standing.
Alternatives to co-signing
If co-signing seems too risky, consider other ways to help your friend without risking your financial health.
Your friend may be able to qualify for a smaller loan on their own or find lenders who specialize in high-risk borrowers. Instead of being a cosigner, consider becoming a co-borrower. This means you share the responsibility for the loan but have more control over payments and loan terms.
Also look into peer-to-peer lending platforms or credit unions. These can offer more flexible loan terms for people with limited credit history.
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This article provides information only and should not be taken as advice. It is provided without warranty of any kind.
