If you have good credit, co-signing a loan for a friend or family member with credit problems may seem like a simple way to help someone you care about secure the financing necessary to make a large purchase. Unfortunately, co-signing a loan can have unpleasant consequences that can negatively impact your credit score and your financial freedom. Once you co-sign a loan, you cannot revoke your signature. Therefore, it is vital that you take the risks into careful consideration before putting your good credit on the line.


You May Be Held Responsible for Repayment


Lenders often request that borrowers with low credit scores secure co-signers due to the high lending risk these individuals represent. In the event that a borrower defaults on his financial obligations, the lender then has the option to pursue the co-signer for the outstanding loan balance. In some states, a lender is permitted to take legal action against a co-signer before ever attempting to collect the debt from the borrower. Given the right to do so, a lender will primarily pursue the person most likely to pay the debt. In most cases, this is the co-signer.


When a borrower defaults on a loan you co-signed, the lender has the right to sue you for the full amount the borrower owes. Should the lender win the lawsuit, it may have the option to seize your bank accounts, garnish your wages, and even place a property lien on your home. In addition, the judgment from the lawsuit will appear on your credit report for seven years from the date it is entered. A judgment is a negative notation and will weaken your good credit rating.


Your Credit Score Can Be Damaged Without Your Knowledge


When you help another individual secure a loan by co-signing, the loan will appear on the borrower’s credit report and yours as well. If the borrower should miss a payment, that missed payment will appear on both credit reports. The lender is not required to notify you that a payment is due because, although you are legally responsible for the loan, the loan does not belong to you. Many co-signers do not become aware of numerous missed payments until they are sued by the lender after the borrower defaults.


The FICO credit scoring formula places a large emphasis on punctual payments. Your payment history is responsible for 35% of your total score. Each time the borrower misses a payment, your credit score will take a hit. Before long, the good credit that allowed you to qualify as a co-signer may be a thing of the past.


The Debt Can Affect Your Eligibility for Financing


The loan you co-signed will remain on your credit report for the duration of the repayment period. Should you need to secure financing of your own during this time frame, your lender will review your credit report and take the loan you co-signed into consideration as one of your outstanding debts. The fact that you are not currently making payments on the debt may be irrelevant to your lender. The borrower could stop making the payments at any time and leave you responsible for the debt. Your lender knows this and may not want to risk lending to you if your income level is not sufficient to support the debt you are applying for along with the debt you co-signed.


Co-signing Can Destroy a Relationship


If you were accepted as a co-signer, you have obviously managed your debts well and taken good care of your credit. You likely hold a keen interest in keeping your credit in good condition. The borrower, however, may not consider good credit to be as important as you do. Thus, he or she is unlikely to understand your anger at any missed payment notations or collection accounts that appear on your credit report as a result of the debt being mismanaged. This can cause animosity between you and the borrower that may not easily be resolved.

The dangers of co-signing often significantly outweigh the benefits of helping another individual secure a loan. Be sure to carefully consider the potential consequences before agreeing to risk your good credit rating and your relationship with the borrower. Even if you trust the individual implicitly, the future is always uncertain, and co-signing now could leave you making payments on a