Consider one of the following situations:
- You’re ready to head into the dealership for your new car… but you can’t get financing without a friend or relative signing on.
- You want to launch a new business… but the bank won’t give you the cash without somebody else’s name on the loan.
- Or you’re anxious to earn the title “homeowner”… but you can’t get the mortgage you need without the help of a cosigner.
The reality is that a cosigner can help you get credit that you’d be unable to qualify for otherwise. But should you get a cosigner? The answer is probably “no.” Here’s why…
1. Your Bank Will Have Less Faith in You
Your bank’s faith in you might not be a big deal if you’re trying to sign up for a credit card or auto loan, but if you’re trying to get a business loan, it’s a huge consideration.
As you grow your new business, the ability to get credit could make or break your ability to pay suppliers and employees on time. For this reason, your bank becomes a major partner in your company’s growth. If they won’t do business with you without a cosigner, then there’s a good chance they aren’t going to give you the credit you need to stay afloat.
2. You Could Jeopardize Your Relationship with the Cosigner
Probably the biggest reason to avoid taking on a cosigner is the potential damage it could do to your relationship if things go sour. I know, I know – you’re not going to default on your loan. You have the best intentions, and you’d never put your relationship with your cosigner at risk.
Just remember that good intentions don’t pay the bills. What would happen if you were in a car accident and out of work for three months? Or if you suddenly lost your job? According to the Council for Disability Awareness, just over one in four 20-year-olds will become disabled before retirement. Emergencies happen, and if you miss payments on your cosigned loan, your cosigner will be on the hook.
3. You Could Prevent Your Cosigner From Taking on Needed Credit
People’s ability to get credit depends, in part, on the amount of credit they’ve already taken on – and the credit you ask them to cosign counts against this.
That may not be a big deal to you, but imagine that your parents have cosigned an auto loan for you, and then suddenly find themselves in the position of needing to get a new car. Their ability to qualify for a loan will be jeopardized because they’re already on yours, potentially leaving them in a difficult position.
4. Your Cosigner May Not Be Able to Afford Your Missed Payments
Now, let’s say that one of those unfortunate emergencies mentioned earlier happens. The best case scenario, as will become clearer below, is that your cosigner gets stuck making your monthly payments until you’re able to get back on track.
But while the monthly payment might have been a perfectly reasonable part of your monthly budget, your cosigner might not be able to swing it quite so easily. That puts your cosigner at risk of not being able to make their normal monthly payments, jeopardizing both your relationship and your cosigner’s financial health.
5. You Could Stick Your Cosigner With Penalties and Default Fees
Suppose your financial challenges aren’t temporary, and you’re forced to stop paying your loan or line of credit altogether. Even though you’ve defaulted, your cosigner still owes the balance due—and that balance can grow quickly if the lender tacks on additional penalties and fees. It’s not uncommon for lenders to add late payment fees, higher interest rates, and other charges or penalties, leaving your cosigner owing much more than the initial value of the loan.
6. Your Lender Could Call the Balance Due on Your Cosigner
In some cases, lenders don’t just stick past-due loans with extra fees. They get nervous, so they call the entire balance due at once. If that surprises you, it shouldn’t. Many lenders do have that power.
A few thousand dollars on a cosigned credit card might be doable for some people, but tens of thousands of dollars on a car loan, business loan or mortgage could ruin your cosigner. Think carefully before putting the people you love in that position.
7. You Could Damage Your Cosigner’s Credit Score
It should go without saying, but defaulting on a cosigned loan doesn’t just hurt your credit score—it hurts the cosigner’s as well. The ding of a defaulted loan could hurt them for years to come in the form of higher interest rates and an inability to secure needed credit.
8. You Could Leave Your Cosigner Facing Tax Penalties
Even if your cosigner isn’t confronted with a due-in-full balance after you stop paying on your loan, they might be able to work out an arrangement with the lender to have part of the loan balance forgiven.
The problem? Your cosigner will then have to claim the forgiven amount on their taxes as “debt forgiveness income,” which is taxable at the end of the year – adding even more insult to injury.
9. Your Cosigner Could Wind Up Having to Sue You
In cosigning your loan, your cosigner becomes legally liable for full payment of the outstanding balance. But just because they’re legally liable doesn’t mean they can’t sue you for your half of the money owed. It sounds cruel, but for some cosigners, it’s the only viable means of making up for the income lost from a loan that’s gone south.
10. You Probably Can’t Afford the Loan in the First Place
Ultimately, there’s a reason banks require a cosigner: they don’t trust that you’ll pay back what you owe. And they aren’t making that judgement just to frustrate you. They have mountains upon mountains of actuarial data to help them decide who’s a good candidate for a loan and who’s too big of a risk on their own.
If you can’t get credit on your own without a cosigner, it’s worth considering that you probably can’t afford the purchase you’re trying to make in the first place. Instead of putting your relationships with your loved ones at risk, wait until you can afford to get credit on your own with no cosigner required.
Need help building your business credit? Read our article on 11 steps you can take to increase it.