One of the worst financial mistakes a person can make is cosigning for another person.

Okay, before you think I'm a heartless person, just hear me out.

No matter how well you think you know someone, mixing money and relationships can completely change things. What you may have thought was a wonderful friendship or family relationship may turn into a horror story.

It may seem very innocent – you’re just helping a good friend or relative get a loan. Really, if it was that simple, I’d tell everyone to do it. But, being a cosigner is making a major financial decision that you need to seriously think about before agreeing to.

A cosigner may be needed for different things such as a:

• Mortgage
• Rental home
• Car loan
• Recreational vehicle

And more.

Now, there are situations when cosigning goes smoothly and nothing bad happens. For my first new car, one of my parents cosigned on it. And, nothing bad happened – I paid off the car loan in full and never missed a single payment.

However, before you cosign a mortgage or something else, it is always wise to be 100% positive of what cosigning a loan actually means and how it may affect your relationship with the person getting the loan.

Surprisingly, many people don't know exactly what happens when they agree to being a cosigner. So many people think that all you're doing is helping a person get approved, but that’s not just it.

Sorry to break it to you, but the bank, landlord, etc., does not care if the applicant has a friend with a good credit history. There's more that comes attached to being a cosigner.

As the cosigner, what's actually happening is that you are taking on the full responsibility of the debt if the original applicant is unable to pay.

According to a survey I found on CreditCards.com, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay.

Other shocking statistics found from this survey included that 28% experienced a credit score drop because the primary borrower failed to pay their loan, and 26% of survey takers found that cosigning hurt their relationship with the person.

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Still thinking about being a cosigner for a friend or family member? Here’s what you need to know before you cosign.

 

What is a cosigner?

Before we begin, I want to explain exactly what a cosigner is. Like I said, many people don't really understand what this term means, and that can really bite them in the butt later.

A cosigner is someone who agrees to be on a loan with another person so that they are more likely to be approved. For example, if your friend can only get a car with a cosigner (either due to them having a low credit score, not making enough money, not having a long enough credit history, etc.), then they may ask you to cosign so they can get approved.

However, as a cosigner, you are agreeing to pay off the debt if the original borrower is unable to pay it in the future. So, even if the original borrower doesn’t pay a penny, the cosigner would have to make all of the payments or risk being sued, having credit report damage, and more.

Remember, like I stated above, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay. Before you cosign a loan, you will want to do two things – know you can trust the person you are cosigning for, and know that you can make the payment. You may be certain you won’t be stuck making the payment, but you don’t want to be stuck in a bad financial situation.

 

Cosigning a loan may prevent you from being approved for future loans.

If you might be buying something soon that will need financing (house, car, etc.), you should think long and hard before you decide to be a cosigner on someone else’s loan.

This is for multiple reasons.

One, if the person doesn’t pay the monthly bills on time, then you may be rejected for a loan in the future. Missed payments can damage your credit score and your credit report.

Two, as a cosigner, you are increasing your debt-to-income ratio. So, even if your friend/family member pays every single bill on time, a lender will still see this as debt. Unfortunately, this may prevent them from approving your loan because they will think you have too much debt on your plate.

 

Being a cosigner isn't something you can easily get rid of.

There's not much you can do to remove yourself from a loan that you cosigned on. If the person isn’t making payments, you are stuck with it for the most part.

To take your name off of the loan, it would have to be refinanced, and there are many horror stories out there where the original borrower refused to refinance because then they wouldn’t be able to force the cosigner to continue to pay the monthly bill.

Plus, there are instances in which refinancing is impossible because of values tanking, the economy changing, and so on. So, while the original borrower may be okay with getting you off of the loan and refinancing, it's entirely up to the lender.

 

Cosigning a loan can ruin relationships.

Unfortunately, many cosigning relationships go sour. I have heard many stories where someone cosigned a loan for someone else and then didn’t talk to them for decades because of a falling out of some sort.

I have always been a firm believer that money and relationships do not mix well. If you are going to cosign or lend money to someone, then you should consider it a gift because there is a chance that you will never see that money again.

 

Cosigning a loan is up to you.

Even though those cosigning horror stories are real cautionary tales, most people don’t believe they would actually happen to them. However, don’t you think those cosigners felt the same way in the beginning?

It’s up to each person to decide if they will cosign, and you should never feel forced. However, I want you to remember that if you cosign, then you should make sure that you can afford to make the monthly payment.

You never know, one day those payments are being made and everything is going well. The original borrower may be a great person, but they may lose their job, have an unexpected expense come up, or something else that prevents them from paying their bills.

Then, what if something happens to you and you can can’t make those payments either? Unfortunately, being unprepared and not really knowing what you are getting into can turn into a disastrous situation.

Cosigning a loan may not always be bad. However, I believe it’s better to realize what the consequences are before going into something that can negatively impact your life. It’s always better to be prepared!

What do you think of cosigning a mortgage or other type of loan? Would you ever do it?

The post Would you risk your relationship and finances to cosign for a friend? appeared first on Making Sense Of Cents.

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