Thursday, August 7, 2014

Good Idea, Bad Idea - Cosigning a Loan

There are many good reasons why you may want to cosign a loan.  Some typical examples include helping a child obtain their college education by co-signing student loans, or assisting your spouse in purchasing a car. With any good idea, however, a small difference in the situation can make it a very bad idea.

Many people are unaware of the consequences of cosigning a loan, and in many many instances cosigning may be a very bad idea.  Take just the two examples described above:  If your child is unable to find a job after college and therefore unable to pay their student loan, that loan will be your responsibility.  If you and your spouse separate and he or she stops paying their car loan, your credit will be affected as well (even if they still have the car).

In these previous three posts we explored what happens when a cosigner or the primary borrower on a loan declares bankruptcy:

What happens to my Cosigner if I file for Bankruptcy?

I co-signed a loan and the primary borrower has filed for bankruptcy. What should I do to protect myself?

I am the primary borrower on a loan and my cosigner has filed for bankruptcy. What should I do to protect myself?


By the numerous comments and questions we receive on all three of those posts it is obvious that many cosignors don't realize how serious this obligation is when they signed the loan.  Many people feel that it should matter that they don't have access to the collateral (such as a house or car) or that they don't have a relationship with the primary borrower anymore.  These are all the inherent risks in co-signing a loan and it doesn't matter to the lender.  If you cosigned a loan, you agreed to pay the money back if the other person doesn't, regardless of the circumstances.

If it isn't paid on time your credit will be affected.  If it isn't paid at all, the lender can sue you for the funds.  If the primary borrower files for bankruptcy and the debt is discharged so that they no longer owe it, you still do!

Cosigning a loan is not something that should be taken on lightly.  There are often good reasons to do it, but you should also consider all of the reasons why you might not want to.  In short, if you can't pay back the loan yourself, then you'd better be 100% positive that the primary borrower will pay it back.  If the lender was convinced of that, then the primary borrower wouldn't need a co-signor in the first place.

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