Should You Co-Sign a Loan? Pros, Cons, and What to Consider

When a loved one asks you to co-sign a loan, it might seem like a simple favor. You might just want to help out a family member or close friend and give them a better shot at improving their situation.

However, before agreeing, it’s essential to understand the responsibilities and risks involved. Co-signing a loan is not just a formality.

It’s a significant financial commitment. In this blog, we explore the pros and cons of co-signing a loan and offer insights to help you make an informed decision before potentially putting your financial health at risk.

What Does It Mean to Co-sign a Loan?

Co-signing a loan means you’re agreeing to take on responsibility for the loan if the primary borrower is unable to repay it.

Essentially, you're vouching for the borrower’s ability to repay the debt, which is why lenders require a co-signer if the primary borrower has limited credit history or doesn’t have a steady income.

A common example is when a parent or another financially stable family member co-signs for a student getting their first car, since the student needs an auto loan but doesn’t have much of a credit history yet.

Who Can Co-sign a Loan?

A cosigner can be a parent, relative, guardian, friend, or even a spouse—basically, anyone willing to take on the responsibility with you.

But it's not just about being close to you. The cosigner has to qualify for the loan just like you do. That means they need a good credit score, steady income, and a solid financial history.

The Pros of Co-Signing a Loan

Help a Loved One Secure Financing

For many, the primary reason to co-sign a loan is to help a loved one who might not qualify for a loan on their own due to poor credit, lack of credit history, or a low income.

Co-signing can provide them with an opportunity to get approved for the loan they need, whether for a car, education, or home purchase.

Building or Rebuilding Credit

If you’re looking to build or improve your credit score, co-signing a loan could help. As long as the borrower makes timely payments, this positive history will be reflected on your credit report, potentially boosting your score. This can be especially helpful if you're trying to improve your credit profile.

Strengthening Relationships

Helping someone by co-signing a loan can strengthen your relationship, showing support and trust in their ability to repay the debt. It can also provide them with the financial assistance they need to achieve their goals.

For parents especially, co-signing for their children can be a way to support them while also teaching financial responsibility.

The Cons of Co-Signing a Loan

Financial Risk

The most significant downside of co-signing a loan is the financial risk. If the borrower fails to make payments, you’re on the hook for the remaining balance. This can place a strain on your finances, particularly if you're not prepared for the added responsibility.

Impact on Your Credit

When you co-sign a loan, it shows up on your credit report just like it would if it were your own. That means if the borrower misses payments or defaults, your credit score could take a hit.

And a lower score can make it tougher for you to get approved for loans or credit down the line. Co-signing can also affect your credit utilization ratio, since the loan counts as part of your overall debt, even if you're not the one using the money.

Strained Relationships

If the borrower defaults or misses payments, it can cause friction in your relationship. The stress of financial obligations and potential conflicts about responsibility can lead to personal tension. It’s important to have clear communication and expectations upfront to avoid misunderstandings later.

No Ownership Rights

Co-signing a loan means you're taking on financial responsibility without gaining any ownership rights to the property or item being financed.

Even though you're equally liable for the debt, you have no legal claim to the asset. In other words, you're accepting the risk without getting any of the benefits of ownership.

What to Consider Before Co-Signing a Loan

Do you trust the borrower's financial responsibility?

Only co-sign if you're confident the borrower is reliable and capable of making timely payments. Review their payment history and discuss their current income situation to get a sense of their financial stability.

Are you financially prepared to assume the debt?

If the borrower misses payments or defaults, you'll be legally responsible. Make sure you can afford to take on the loan if necessary.

Consider how this additional potential liability might impact your own financial goals and credit utilization ratio. It's wise to have an emergency fund specifically set aside to cover these payments if the need arises.

Have you discussed all terms and expectations?

Have an open, honest conversation with the borrower about repayment plans, deadlines, and what happens if payments are missed.

Document your agreement in writing, even if it's just an email or text message thread that outlines the responsibilities of both parties. This paper trail can help prevent misunderstandings and provide clarity if financial tensions come up later.

How will this impact your credit?

Co-signing can affect your credit score—positively or negatively—depending on how the loan is managed. The loan will appear on your credit report. This debt will also impact your debt-to-income ratio, which could potentially limit your ability to qualify for your own loans or credit cards in the future. Consider asking for access to the loan account so you can monitor payments and address any issues before they hurt your credit.

Read more: Straight Talk About Loan Defaults

In Conclusion

Co-signing a loan is a serious commitment that comes with both potential benefits and risks. It can be a great way to help someone you care about, but it’s important to fully understand the responsibilities involved.

We understand that this process can be confusing sometimes, that’s why our team is here for you. If you're considering co-signing a loan or have questions about the loan process, feel free to contact us at First Pioneers, your trusted federal credit union in Lafayette and New Iberia, LA.

We’re here to help guide our members in Lafayette, Acadia, St. Martin, Vermilion, and Iberia parishes through the decision-making process and provide advice tailored to your specific situations.

We also offer personal, auto, and home loans with competitive rates to support our members across the Acadiana area, whatever their financial goals may be.