It seems fairly innocuous – a friend or family member wants you to co-sign on a loan because they don’t qualify. They assure that they’ll make the payments, they’re convincing and very appreciative. You want to be a nice person and help them out. The more you think about it, it’s not like it’s going to cost you anything…is it?
Think of it this way. They couldn’t get a loan unless you co-sign for them. If they don’t make the payments, the lender is going to look to you to repay the loan plus late fees and collection fees. The lender may be able to sue you, file a lien on your home or garnish your wages.
And it’s not just money that you could be losing, it could be your credit too. Co-signing a loan is a liability that could affect your FICO score, your debt-to-income ratio and your ability to borrow.
Co-signing is an obligation to repay the debt if the other signer can’t. You could be out the money and unable to recoup the loss because you don’t have control of the asset. The impact on your credit could take years to recover.
If you do choose to co-sign a loan for someone, you’ll be doing a very nice thing for them, but make sure you consider all of the ramifications involved before you decide to sign.