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Someone close to you reaches out about cosigning on a loan because you are the most financially responsible person they know. Despite knowing how to make your own decisions regarding whether or not you should take out a loan, becoming a cosigner on a loan involves additional considerations regarding the reliability of the individual requesting that you cosign.
Why a Cosigner is Required
A lender requests a cosigner when they do not fully trust the borrower with the requested loan. This lack of trust typically stems from a poor credit score or bankruptcy. Credit scores exist to show how well a person manages borrowed money, and a lender requests a cosigner when they do not feel confident that the borrower can manage borrowed money based on the facts at hand.
This could be for a number of reasons. Young adults frequently need cosigners to secure a car loan or student loan because they simply have not used credit in the past and lack the credit history and payment history to show lenders that they are responsible. (If an adult in their life made them an authorized user earlier, this issue could have been avoided!) Alternatively, folks recently coming back from bankruptcy or a disruptive life event like divorce may have insufficient credit scores to acquire the initial loans to start their next stage of life. Others simply may manage borrowed money poorly.
The Implications of Cosigning a Loan
A cosigner is someone who accepts responsibility for a loan alongside the borrower initially requesting the loan. As Tiffany Aliche emphasizes, “You aren’t just vouching for the borrower, you are also the borrower.” The cosigner is just as responsible for the loan as the main borrower. If payments on the loan are late or nonexistent, this hurts the credit score of the cosigner as well as the borrower.
Do Not Be Pressured to Cosign a Loan
Since cosigning a loan creates as much personal risk as when you take out a loan yourself, consider a request to cosign on a loan carefully. In general, you should not cosign a loan. The risk to your own credit score and financial safety is too risky. If you have any doubts about the individual’s ability to repay the loan according to the agreed upon schedule, do not cosign.
It can be difficult to refuse loved ones in difficult financial situations if they come to you for help. However, take the advice of Financial Feminist Tori Dunlap: When it comes to finances, you have to help yourself before you can help those around you. Consider boundaries for yourself before the question of cosigning a loan presents itself. Maybe you would be unwilling to cosign unless the loan was an amount that you could hypothetically pay off tomorrow if absolutely necessary. Whatever boundaries you set, make sure they allow you to sleep well at night without worrying about your credit score or financial future.
Escaping When You Already Cosigned
If you already cosigned on a loan and realized it was not an optimal decision for your situation, there are ways to remedy the situation. First, if you cosigned a loan and the borrower consistently made payments over time, you may be able to apply for cosigner release. When a loan is in good standing, providing a history of reliable payments can provide sufficient evidence that the individual can handle the loan independently. Particularly in situations where a young person initially has a low credit score due to a limited payment history and credit history, establishing this history can be enough to establish themselves as a reliable borrower.
A related path is for the borrower to refinance the loan without you listed as a cosigner. Similar to cosigner release, this typically requires the current loan to be in good standing. Particularly if interest rates have decreased, this could be an opportunity for the borrower to lower their monthly payment and an opportunity for you to eliminate your responsibilities as a cosigner.
You could, of course, also simply pay off the loan entirely. This is usually a terrible idea for a whole host of reasons, but it is a contingency that exists.
When to Cosign
You should almost never cosign a loan. Almost never does not mean absolutely never. Patrick cosigned for his younger brother’s student loans because he knew his younger brother’s plan was to join the military after college and eventually get his loans forgiven. He also knew his brother was a financially responsible person but happened to be a young adult with no prior credit use. True to agreement, Patrick’s brother finished college, joined the Marine Corps, and had his student loans forgiven. The act of cosigning this particular loan cost Patrick nothing and it allowed his brother to pursue a successful career through a well-executed plan to avoid debt.
In general, there are two situations in which folks can consider becoming cosigners. This does not mean you must if you are in one of these situations: Only cosign if you are comfortable with it! However, the two instances where cosigning makes sense are:
You are helping a young person you know extremely well, reviewed the loan repayment plan with them, and feel completely confident that they will repay the loan. This is typically a case when the person has limited credit due to their short or nonexistent credit use.
You have enough money to pay off the loan tomorrow and would feel comfortable paying off the entire loan if needed. This usually happens when someone you know is going through a tough life situation. You would not mind giving them the money directly, but they are trying to get back on their feet without that kind of bailout. Cosigning allows them to help themselves if all goes right, but you will plan to pay off the loan if anything does not go according to plan.
Some individuals may have a higher or lower threshold for becoming a cosigner on a loan. There is no correct answer, other than you need to feel comfortable with your decision and your finances. If you are asked to cosign on a loan, consider whether your finances are in a place where that is possible for you and whether the individual borrowing money has an adequate repayment plan. Do not cosign a loan that makes you uncomfortable. Since every situation is different, consult a financial advisor before cosigning.
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