5 Reasons not to Co-Sign on a Loan

Loan Word Cloud Concept in Red CapsThere are few things quite as distressing as finding out a friend or loved one is seriously struggling with money. But in the midst of the recent recession this is a regrettably frequent occurrence. The cost of living continues to rise, while jobs are still scarce and many professionals have been forced into pay cuts or reduced hours just to keep their jobs. If you’ve weathered this storm and are still financially whole you’re not exactly in the majority. And you most likely want to help the people you care about to navigate their way through this trouble as well. You might be tempted to assist them by co-signing on a personal loan. But while this may alleviate the immediate pressure for the other person, it also causes all sorts of potential problems and future heartache. Here are five reasons you should think twice about co-signing on a loan.

First of all, by stepping in on another’s behalf in this way you are assuming all of the potential risk, with next to zero reward. Co-signing could help the other party squeak by on a mortgage payment, or push through a car lease. But you won’t be living in that house or driving that car. The benefit that loan provides your credit rating is far outweighed by the damage your rating could incur if the other party misses payments or defaults on the loans.

While you may be shocked to find this out, if that loan default were to happen, the lender will come after you first. That means months could pass, and all of a sudden you find a court summons in your mailbox declaring you’re being sued by a bank. The bottom line is, by co-signing you are telling the lender that you accept responsibility for any potential problems. So if the loan goes bad, that lender will come after you before the other party. In most cases you’ll have the better credit score, so the lender will assume that you’re the better bet for getting their money back.

Taking that even a step further, you must understand that while you are only a co-signer, you are actually 100% liable for that loan. Your friend or family member may approach you with all of the best intentions, but they cannot see into the future. If further financial calamity were to come their way, they could skip town and leave you holding the bag. And the lender will come your way looking for the entirety of the owed money. Even if your friend were to die, the responsibility for the loan would still fall on your shoulders.

Even more surprising, you could take a tax hit just for being a co-signer on the loan. This might be the case regardless of how the loan plays out. But imagine the balance of the loan is more than your friend can pay, and the bank comes after you. If you negotiate a settlement amount that’s lower than what’s owed you’re going to have to report the remainder to the IRS as income from debt forgiveness. The loan will be listed as settled, not paid in full, so your credit score will take a hit. And you’ll have a hefty tax bill as well.

Finally, there are all sorts of emotional complications to navigate as well. Perhaps you care deeply for the other party, and you want him to make sure he can pay off thoseĀ Arizona title loans. It’s a noble aspiration, but the only thing that can come out of it is stress and disappointment. Even if they pay the loan off, chances are the owed money will be in the background of any conversations the two of you have together. Having to keep asking for your money will always cause discord, and potentially destroy the relationship with that person you were only trying to help.