Jump to main content

News & Promotions

What to Consider Before Co-Signing a Loan

At some point along the way, a family member or close friend may ask you to co-sign a loan. While this may sound like something you’d be willing to do to help them out, you need to have all the facts in place first to understand the ramifications co-signing a loan can have on you.

What Does it Mean to Co-Sign on a Loan?
When you co-sign a loan, you are essentially applying for the loan with the other person. Your good credit will be used to help someone with limited or poor credit get the loan they desire. This means that you legally agree to make payments if the primary borrower is unable to do so. The only time a co-signer is needed is when the primary borrower cannot obtain the loan based on their credit, income, or other criteria alone.

Considerations to Keep in Mind Before Co-Signing
You need to understand all the risks involved before co-signing a loan with someone. Even people you love and trust may have difficult days ahead that could cause problems for you if you co-sign a loan with them.

These are the things you need to consider before agreeing to take such a significant step.

  • Know the risks. Co-signing a loan makes you equally responsible for ensuring monthly payments are made on time. Suppose the primary borrower cannot do so or has difficulty making timely monthly payments. In that case, it could adversely affect your credit score, making it difficult for you to gain loan approval and a competitive interest rate in the future.  Late payment history is typically listed on your credit report for up to 7-years.
  • Iron out the details. While it may be uncomfortable, you need to have a serious discussion about how payments are to be made and the need for your loved one to come to you FIRST if they are unable to make a payment on time – or at all.
  • Understand how co-signing affects your own goals. Before co-signing, you need to determine if you will still meet your own financial obligations and achieve your own financial goals. It is important to consider the possibility of having to make the payments on the loan if your friend or loved one is unable to do so.
  • Vehicle Loan Considerations.  Take the time to review the loan amount and the monthly payment. Try to avoid co-signing the loan if the vehicle value will be less than the loan balance.  If you and the primary borrower decide to sell the vehicle, you don’t want to be forced to come up with additional funds to sell the vehicle. Also, compare the loan amount to the primary borrower’s income. One rule of thumb is that the primary borrower should limit the loan to no more than 50% of their annual gross income.

The better you understand the risks, the better shape you’re in to make informed decisions about whether co-signing a loan is the right choice for you. This is something many parents may do for a child when planning to assist in auto loan payments so the child can build good credit. However, parents must understand that they may have to make all the loan payments in order to manage their credit if their child falls on hard times or makes poor choices.

However, co-signing a loan is never a decision that should be made lightly or done for anyone you’re not sure will be honest with you if they need help to stay on top of things.

We’re Here to Help!
Your credit union understands that family dynamics are tricky when it comes to money. We are here to help you sort out the financial information so you can make informed decisions about co-signing a loan and many other questions you may have.

Call or visit the Credit Union to ask any questions you may have and to learn about credit products, such as  credit builder loans, to help you or your loved one build better credit.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.