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Why Co-Singing for a Loan is a Bad Idea

Co-signing a loan for someone may seem like a nice thing to do. However, there are many reasons why co-signing on a loan can be extremely dangerous to your own finances. In most cases co-signing on a loan has more risks then benefits. Here are six reasons why co-signing is a bad idea.

Lots of Risk for Little Reward

You may be co-signing on a loan for a house you aren't living in or a car you are not driving, however that doesn't affect your liability. On top of this, the only personal benefit is the slight increase in your credit score due to the monthly payments that are hopefully made on time. When co-signing on a loan you are taking on the responsibility of dealing with the loan if it cannot be repaid on time. Although you may be tempted to help a boyfriend, friend, girlfriend, or family member out, you must carefully consider the risk.

Sued if the Payments Are Not Made

Due to the fact that you are the reason that the loan was given out in the first place, the lender will turn to you first when payments are not made. This means that you are completely liable and will be sued first. This is due to the fact that a co-signer's credit is substantially higher, and so they will more likely be able to make the payments. If you do not want to risk getting sued for a debt that isn't even yours then you should reconsider co-signing on a loan.

Family Relationship or Friendship

Once you have co-signed a loan, it is in your hands to ensure that the loan's payments are made. However, doing so can cause a substantial amount of stress for you and the party who is making the payments. This is especially the case if you find yourself having to make phone calls to your family member or friend asking why they are not making the payments. On top of this, if they do not make the payments whatsoever, they could singlehandedly destroy your finances, which is not healthy for any sort of relationship. Keep in mind that one late or missed payment works against your credit. If you are not willing to forgive your loved one then it is a sure way to destroy your relationship with them.

Tax Consequences if the Loan is Settled

Some lenders do not want to have to deal with going through the process of suing if the loan is not repaid and so may agree to simply settle the balance that is owed. This means you may be tax liable for the difference. For example, if you owe $12,000 and settle for $8,000 then you would have to report the remaining $4,000 as a "debt forgiveness income" when filing your tax returns. On top of this, settling an account will place a negative mark on your credit score.

Could Make Approval of another Loan Impossible

Before you agree to co-sign a loan for someone you should consider whether or not you will your credit for yourself. If you over-extend your credit then you may be denied from any other type of loan in the future. You must consider your future carefully before agreeing to co-sign a loan, as this can negatively impact your finances in the future and your ability to obtain a loan for yourself down the road.

Forced to Remain Extremely Organized

Do you find it difficult to keep track of your own payments and bills? If you agree to co-sign a loan then you will have to keep track of not only your finances, but someone else's as well. This means being forced to check every month by calling customer service or going online in order to ensure the payments were made on time. You cannot just assume that the payments have been made each month, as this is a recipe for digging yourself into a financial hole. If you wait until you get a phone call from a debt collector then your credit score will already have been impacted.