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The Pros and Cons of Cosigning a Loan

Having a friend or family member ask you to cosign a loan can trigger a number of questions and concerns. Because someone you care about needs help, it can be tempting to agree to be a cosigner, without thinking through all the possible things that could happen as a result. Here are some things you should know about what it means to be a cosigner, and the pros and cons of cosigning a loan.  Group of people discussing cosigning a loan

What it Means

In the simplest terms, being a cosigner on a loan means you are responsible for paying it back if the other party defaults on the loan for any reason. It’s a big decision and one that you should take seriously.

Pros of Cosigning a Loan

  • Helping someone you care about — Helping someone get the credit they need can make a big difference in their lives and have a positive effect on their credit, if  they pay back the loan.
  • Greater diversity of accounts — Although one of the lesser factors, having a variety of different types of credit accounts is one of the factors that determines your credit score. So if you’re cosigning for a type of loan you don’t currently have, it might be a good thing.

Cons of Cosigning a Loan

  • Increased responsibility — Once again, if you cosign for a loan, you are responsible for paying if the other party can’t. Could you handle the increased financial responsibility?
  • Potentially strained relationship — Many personal relationships have been damaged or ended because of financial strain. Ask yourself how much you trust the person who is asking for help and how you will feel if you end being responsible for their loan.
  • Potentially lower credit score — Depending on the current state of your credit, specifically your debt-to-income ratio, taking on additional debt may cause your credit score to drop.

Bottom Line

Ultimately, the decision whether or not to cosign a loan is yours and yours alone. If you decide to say yes, be prepared for all it entails. If you choose to say no, consider offering to help in another way, such as offering free babysitting to ease the cost of child care, or providing leads for a new, higher-paying job.

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