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 your 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 casual favor, co-signing a loan, or any financial commitment, could have serious consequences if something goes wrong. A missed payment doesn't just impact the borrower, it could hurt your credit as well. 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? First, understand 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 own reputation on the line. If that person doesn't live up to your recommendation, it may harm your relationship. When you co-sign a loan or credit card, you're vouching for the primary applicant—and you're also making a financial commitment.

Someone might ask you to co-sign because a lender wants more assurance before approving the loan on their own. A borrower with a thin credit file, blemished credit history, or unstable income may need a co-signer. Your credit and income can strengthen the application.

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, even if you have no right to spend it. The lender could come after you if the borrower misses payments.

• If reported to credit bureaus, the loan shows up on both credit reports. If a payment is missed or the borrower defaults on the loan, your payment history and credit score will also suffer.

• Your future borrowing could be impacted. Lenders may count the co-signed loan as your own debt when calculating your debt-to-income (DTI) ratio. In that case, the payment for the co-signed loan could affect whether you qualify for other credit like a mortgage.

Pros and cons of co-signing a loan

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Can I remove myself as a co-signer?

You generally can't be removed as a co-signer from a personal loan. According to the FTC, releasing co-signers is not a standard practice in the personal loan industry because it increases the lender’s risk while providing no benefit.

This differs from student loans, which may allow co-signer release. Co-signer release may also be possible for some installment loans like auto financing once the borrower makes a number of on-time payments.

The emotional side: co-signing can affect relationships

A co-signed 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 might strengthen your relationship to offer this gift to a loved one. Or 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. As a co-signer, you typically don't share access to the funds. With a joint personal loan, the two of you share the funds and are equally responsible for repayment.

A co-signed loan for your spouse 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?

A co-signed loan 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.

How to protect yourself if you decide to co-sign

A few simple steps could help you co-sign with your eyes open and protect your own finances:

• Review the borrower's budget and repayment plan before you sign, so you know they can handle the payments.

• Ask the lender for the full amount you could owe, including any late fees or collection costs, so you aren't caught off guard.

• Have the lender notify you if a payment is missed, and request copies of all loan documents so you can track the account.

• Check your own credit reports regularly while the loan is open, so you can catch any errors or missed payments early.

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

Before you agree to co-sign, ask these questions:

• 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 Personal Loans.