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4 Reasons Not to Cosign a Personal Loan

The Motley Fool logo The Motley Fool 4/15/2021 Christy Bieber
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Personal loan lenders check the credit and income of borrowers before they provide them with a loan. If their financial credentials aren't good, they may be denied the chance to borrow without a qualified cosigner.

If you have good credit, there's a chance some day your loved ones may ask you to be that cosigner. That would mean you apply for the personal loan with the primary borrower; your credit would be evaluated by the lender, and you'd become legally responsible for the loan too.

While it's tempting to provide that type of help, the reality is that there are many reasons why you may not want to guarantee a loan for someone else. Here are four of them:

1. You may be responsible for paying it off

If you cosign a loan, you agree to vouch for the primary borrower who is taking on the debt. Essentially, you're committing to pay back the lender if they don't. As a result, you could very well get stuck paying back some of the borrowed amount.

There's often a reason why people need a cosigner:

  • Perhaps they don't have a solid track record of paying bills on time.
  • Maybe they're young and haven't had time to develop a strong credit history.
  • They may have had some bad luck and lost a job or had a medical issue.

Whatever the reason, unless you're very confident the person you're cosigning for is financially responsible and will pay back the debt, there's a serious risk you could end up on the hook for it.

And, sadly, if something happens and the primary borrower can't pay back the loan -- such as death or disability -- the creditor would still expect you to repay it. So there's always a chance you could get stuck footing the bill.

2. It could affect your ability to borrow

A cosigned loan shows up on your personal credit history. In other words, the payment counts toward your debt obligations, and lenders see it when they evaluate your credit. For more information, check out this article on what information is on a credit report.

This means your own future ability to borrow money could be affected because of that debt, since most lenders look at your debt-to-income ratio before approving you for a loan.

If you want to get a credit card, mortgage, car loan, or any other debt and you've cosigned a personal loan, the monthly payment on it could very well push your monthly debt obligations over the lender's limit. If that's the case, your loan could be denied.

3. You could damage your relationship with the borrower

If the person you cosign for ends up being unable to pay back the debt and you get stuck with it, this could leave you resentful and angry, which could leave your relationship in tatters.

Think about whether the financial help you're providing is worth this potential consequence.

4. Your credit score could be damaged

The payment record for the cosigned personal loan also shows up on your credit. If the primary borrower makes late payments, those will show up on your record and damage your credit score. This could affect your ability to borrow for a long time. Your credit report could also be reviewed by utility companies, potential employers, landlords, and insurers. So you could face a lot of financial damage until you rebuild your credit.

The bottom line is that putting your credit on the line for someone else has major financial and personal consequences. It's not something you should say yes to unless you have a very good reason to do so.

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