If a friend or family member can’t get approved for a loan because of fair or bad credit, you may be able to help by being a co-signer. But this decision shouldn’t be taken lightly. In co-signing, you’re taking on equal responsibility for paying back the full amount.
Here’s what you need to know before helping someone take out a co-signed loan.
1. You’re equally responsible for the debt
By co-signing a loan, you’re agreeing to pay it back if the primary borrower can’t or doesn’t. Make sure you can afford to pay the full amount, and any late fees and collection costs that may be added if the primary borrower flakes out.
2. It can hurt your credit score
The loan you co-sign will be listed as an obligation on your credit reports — exactly as if you had taken out the loan by yourself. If the borrower makes a late payment or defaults on the loan, or if you’re asked to pay the loan and can’t, your credit will be negatively affected.
3. You may not be able to get other credit
If you co-sign a loan and then later apply for your own line of credit, you could be denied. Creditors will see that you’re financially obligated to pay the co-signed loan, and they could determine that you can’t handle another.
4. You can negotiate the terms of your co-signer obligation
If you become a co-signer, the creditor will outline your financial obligations in writing. However, these terms are negotiable. For example, ask if you can be held liable for the principal loan amount only, not any late fees or court costs. If the creditor agrees, make sure that agreement is in writing.
5. It’s hard to be removed as the co-signer
Once you co-sign a loan, it’s very difficult to be relieved of that obligation. Generally, even a divorce isn’t enough to terminate a co-signer’s responsibility for the loan. To remove a co-signer from a loan, the borrower must pay it off, refinance or release the co-signer from responsibility.
6. Creditors may come after you first
In some states, the creditor can collect from you before approaching the borrower. If you don’t pay, creditors can sue you or garnish your wages until you or the borrower pays back the loan.
This article was updated July 27, 2016. It originally published Dec. 31, 2014.