It’s not uncommon to hear heartbreaking stories of conflicts arising between family or friends who have agreed to co-sign a loan. They enter into the co-signing arrangement with good intentions, only to find themselves facing unexpected financial burdens.

In most cases, lenders require a co-signer when the original borrower lacks the reliability to qualify for the desired credit. The decision to co-sign is based on the individual’s credit history and report. Whether it’s a mortgage, auto loan, or apartment lease, inadequate credit may necessitate a co-signer.

Understanding the risks before agreeing to co-sign is crucial to safeguarding yourself from potential financial hardships. When someone with less-than-ideal credit seeks financing, they may need to ask for assistance. This can be an uncomfortable task, both for the borrower and the potential co-signer.

So, if you’re approached to co-sign, approach it cautiously. Establish a policy of starting with a default “no” and only deviate from it if circumstances truly warrant. Failing to adhere to this policy can lead to devastating consequences for everyone involved.

Here Are Some Reasons to Say “No” to Co-Signing a Loan

Family and friends can be some of the best life assets any individual will have. Agreeing to arrangements that could put a wedge between these relationships is something to consider. It’s always wise to ask if losing a great friend or family member over a bitter financial outcome is worth it. Here’s a quick test; if you’re not willing to just give that amount of money to this person as a gift and it would affect your relationship if that money was never paid back to you, the answer is “no”.

Here are a few other reasons it’s best to say “no” when asked to co-sign a loan.

1. Often the co-signer is the one who the lender contacts and pressures if there are missing or late payments. Remember, the co-signer is the one who has good credit and who the institution relies on to make payments in the event the primary borrower is unable to. Why would a lender bother contacting the individual who has poor credit? The first time the co-signer gets a collections call, damaging financial and emotional consequences may begin to surface.
2. The co-signer will be liable for the debt if the original borrower doesn’t pay. Often, the co-signer may not have access to the assets they co-signed for. In this case, it becomes a total loss for the co-signer. Ongoing payments, a lump sum, and even collection and attorney fees may be the consequences for the co-signer.
3. Co-signing a loan means that the co-signer now has a new fiduciary obligation. This obligation shows up on the credit report of this individual as well as for the original borrower. This added debt could be a future impediment to the co-signer’s ability to borrow due to higher debt levels. If the primary borrower slips and misses payments, it will negatively affect the co-signer’s credit report too.
4. A co-signer must maintain an open and honest relationship with the original borrower. The co-signer will need to stay on top of payments made to manage both the relationship and personal finances.

What’s the Alternative if Your Policy is to Just Say “No”?

Here’s a suggestion. Since a person who wants to take out the loan trusts those asked to co-sign, consider paying for the item outright. Especially in the case of children, a spouse, or a close family member. Taking this step may reduce the possible negative consequences for everyone concerned since in this case the co-signer would otherwise be the primary borrower in full control of making payments.

The individual in need of the support will have time to repair damaged credit. At a later date, the debt can be repaid. The individual who pays for the item can offer sound financial planning advice, or point the person in need in the direction of a good financial advisor.

This method requires that the individual who makes the purchase prioritizes love and concern for the other above repayment. If the relationship doesn’t warrant this kind of sacrifice, then it’s arguable that the original remedy is still the best remedy – just say “no.”