Blending family, friends, and finances can be risky. A variety of emotions are attached to the decision to cosign a loan for a friend or family member. They may sincerely need your help, or you may feel an obligation to help because they have provided financial assistance in the past. Either way, you have to weigh the potential pros and cons of cosigning a loan, and the impact it can have on your finances. The information below will outline what cosigning is and how to decide whether it’s the right choice for you.
What Does Cosigning a Loan Mean?
Cosigning is a simple concept, yet it can significantly impact your financial status. Cosigning a loan means you agree to pay off a financial debt if the primary borrower can’t or won’t. Many times, those who have bad or unestablished credit need someone to fill this role to qualify for a loan.
Pro – The Feeling of Helping Someone
There is a strong connection between money and emotions. That’s why it is worth mentioning that there might be strong feelings involved in this process. In the beginning, you may feel good that you are helping someone get on their feet and improve their financial standing. However, it is still worth necessary to exercise sound judgment to avoid making a decision based solely on feelings of obligation or guilt.
Con – You’re on the Hook for Payments
If, for any reason, your family member or friend decides to stop paying the loan, you are responsible for all future payments. This situation can create a substantial financial burden for you as you have to pay for a debt that you did not directly incur. Are you ready to handle the financial responsibility a situation like this could bring?
Pro – Potentially Raise Your Credit Score
In addition to your debt amount and ability to manage bills, the diversity of your credit also counts toward your credit score. If you are cosigning for a type of loan that you have not yet undertaken, it could be in your favor to follow through. However, you have to make sure cosigning for this loan fits your financial goals.
Con – You Could Also See a Significant Dip in Your Credit Score
Again, because you are connected to this loan as a cosigner, the actions of the original owner of the loan will, unfortunately, impact you as well. If the individual you cosigned for pays late or fails to pay at all, your credit score could take a hit.
Is Cosigning a Loan For You?
Before you decide to cosign for anyone, you have to understand the financial obligation you are making. It may not be that your family member or friend is unreliable, but they may fall into financial hardship that leaves you footing the bill.
Also, delicate money matters such as this one can cause strained relationships and animosity. Be sure to weigh your options. Most times, cosigning a loan is not in your best financial interest, but if you do agree, make sure you can handle the debt if it becomes your sole obligation.
If you find yourself in a position where you have more debt than you want or need, I invite you to join Money Coach University. There are several free and paid courses you can take to ease the load debt adds to your life.