Should I co-sign a personal loan for someone? Here’s what to consider before you say yes

It's natural to want to help our loved ones succeed in life. You might lend them your car if theirs breaks down or offer a helping hand when the babysitter cancels. Or you might consider co-signing a loan when they're struggling with their credit. 

Unlike a night of babysitting, co-signing a loan—or anything financial—could have serious consequences if something goes wrong. Missed payments could hurt your credit, and you could even wind up being sued if the debt isn't repaid.

Does that mean you should never co-sign a loan for a friend or family member? Not necessarily. Sometimes it could be just what they need to take control of their financial future.

It's hard to predict the outcome, however. So how do you decide whether to co-sign? We'll discuss the pros, cons, and potential consequences of co-signing a loan so you can make an informed decision that minimizes your risk.

What happens when you co-sign a personal loan

When you vouch for someone socially, you put your personal reputation on the line. If that person doesn't live up to your recommendation, it may harm you socially. When you co-sign a loan or credit card, you're vouching for the primary applicant—and you're also making a financial commitment. 

Here's what it means to co-sign a loan:

• You both take financial responsibility for the loan. You're equally liable for the money, meaning the lender could come after you if the primary applicant stops making payments.

• The loan shows up on both credit reports. This includes the payment history. If a payment is reported as late or the account becomes delinquent, your credit score could have a big drop.

Pros and cons of co-signing a loan

What are the risks of cosigning a loan? 

Missed payments could hurt both credit scores and relationships. Discuss repayment and have a backup plan before signing.

Can I remove myself as a co-signer?

Sometimes, but not always. You generally can't remove yourself as co-signer from a loan—you need to get the lender to agree to remove you. For the lender to agree to this, the main borrower will need to convince the lender that they can handle the loan on their own.

Most lenders won't even consider removing a co-signer until they're received a number of on-time payments. Expect to wait at least a few months, if not up to a year on longer installment loans. Then, the lender will likely run a credit check on the main borrower to find out if there's been any improvement to their credit scores. 

The emotional side: co-signing can affect relationships 

Co-signing a loan has financial and legal implications, but the potential relationship impacts could be even more important to you. 

So long as everything goes well, it could help strengthen your relationship to offer this gift to a loved one. On the other hand, the relationship could suffer if they don't repay as promised and you have to deal with the consequences.

Should I co-sign a personal loan for my adult child?

You need to decide if your adult child is responsible enough to handle a loan. If the answer is yes and they just need a little help, it could be a good move for you both. This could be a great time to talk about budgeting and how to manage borrowing the right way. If they're not mature enough to make their payments on time, it might be better for everyone to help them learn better financial management before taking on a loan.

Should I co-sign for my spouse or partner?

Whether you should co-sign for a partner depends a lot on your shared financial goals. Unless you live in a community property state, your debt is typically separate from your spouse's debt unless you apply together—or if you co-sign.

A joint loan where you're a co-borrower is different from co-signing a loan. When you're a co-borrower, you have equal rights to the proceeds of the loan. As a co-signer, you typically don't share access to the funds.

Co-signing for a spouse's loan could be a good way to help them build credit and reach a financial goal. You might want to go over the household budget and manage the loan together so that you're both assured everything stays on track.

Is it a good idea to cosign a loan for a friend or family member?

Co-signing for a loved one could be a great way to help them out as long as you're certain they can repay the loan in full and as agreed. It's smart to go over their budget and repayment plan to make sure they've really thought everything through and can manage the payments.

Should I cosign a personal loan for someone? 

Only if you fully understand the responsibility and trust the borrower to make on-time payments. You’re legally liable if they miss payments.

Questions to ask before you agree to co-sign a personal loan

Considering co-signing? Ask these questions before you agree:

• What's your plan for repayment?

• Is your income reliable?

• Do you have a budget?

• How will you handle monthly payments?

• Have you ever missed a debt payment before?

When saying no is the kindest choice

If you have any qualms about co-signing at all, listen to your gut. You don't want to sour your relationship by agreeing to something you’re not sure about. 

Instead, tell them that you care about them but aren't sure this is the right move. You might have some phrases ready to use. For example, “I care about you, but I can’t take responsibility for your financial commitment.” 

Then, offer other kinds of help, such as going over their credit and budget. Your experience and advice could end up being more valuable than co-signing in the long run. Not sure where to start? Find out if they even need a co-signer by showing them how they can check their rate with Achieve.