The Disadvantages of Cosigning

Credit History and Score

Since co-signing a loan is the same as taking it out yourself, it will be reported to the credit bureaus and become a permanent entry on your credit history report until it's paid off. Also, if your ratio of balance to total credit available is too high, your credit rating can fall because 30 percent of your score is based on the amount of money that you owe. With a low credit score, it will be difficult, if not impossible, to qualify for a needed loan. In that event, you will not be able to make a large purchase until the entry is removed from your history.

Default

If the original borrowers on the loan miss a payment or default, creditors will contact you for money. If the debt remains unpaid, collection agencies may work aggressively to force you to do as you committed when you signed the loan contract. You can be sued in court by the creditor. If a judgment is made against you, your wages and bank account risk being garnisheed until the debt is repaid.

Options

Before you co-sign, consider helping the borrower improve his credit rating and wait to apply for a loan on his own. Using a credit card responsibly and paying the balance each month, in addition to paying all his bills on time, will help to improve his score. Alternatively, offer to give him money or make a personal loan, even though it may not be repaid, so that you will not experience the hassle of being responsible for paying back a creditor. However, if you do find yourself in a repayment situation with a lender, negotiate the total balance and try to pay it off so that you can begin to rebuild your credit and savings again.