We know what you're thinking: If you can already afford to pay in full why would you want to co-sign in the first place? This is an important question to keep in mind as we explain to you the potential pitfalls of co-signing.
Why Do People Co-sign in the First Place?
In general, if somebody asks you to co-sign for them, it's either because:
- They can't get approved on their own, or
- They've been approved at a high interest rate and would like to get it lowered by getting a co-signer.
Remember, co-signing isn't just helping somebody out with their loan. It's also asking you to cover their debt in case they don't or can't. Banks generally know how to assess risk, so when you co-sign with someone who really needs one, you're taking a financial risk that professional lenders refused to.
If that friend, family member or coworker you co-signed falls behind in their payments (or just chooses not to pay their bills for whatever reason), you'll get harassing calls demanding payment. It's a no-win situation: lose a close loved one or lose your money.
Is Co-Signing Always a Bad Idea?
Of course not. In plenty of cases, we would be the ones who can't get a loan unless we co-sign. But just as it's a liability for us to accept when someone asks us to co-sign, understand that we become a risk for the other person when we ask them to co-sign. We shouldn't feel too comfortable putting another person a risk that way.
Which is why it's better to have enough funds to pay off the loan yourself in full before considering a co-sign situation. It can still help lower interest rates and make it easier on the monthly payments, but it also protects both signees against losses in the event that one of them cannot keep their end of the bargain for whatever reason.
But They're My Spouse / Best Friend / Family! I Can Always Count on Them!
Can you, really? We're not trying to cast doubt on the strength of your relationship to those close to you, but in reality, we can never know what would happen in future. They might get into an unfortunate financial situation, an expensive medical emergency, or any number of possible circumstances that can lead to them not being able to fulfill their role.
Yes, in some cases it's perfectly okay to co-sign on a loan if you're a parent helping out a child, or other situations where you're actually the one paying off the full thing anyway. But even in these cases, our advice remains useful: do not co-sign a loan unless you're prepared to pay for the whole thing yourself.
While you're thinking about loans, check out our personal loan comparison tool to know which loans has the best interest rates and offers that suit your needs. Do you have something to add to the conversation? Do let us know in the comments section down below!