Recently, the topic of cosigning a loan came up in a conversation I was having with a friend. Someone I know of cosigned a loan for another person, and now the original borrower isn’t paying any of the monthly payments. They are doing this on purpose – to get back at the person who cosigned a loan for them because of a recent falling out.
The above may sound crazy, but I have heard many stories where a person cosigned a loan and it went badly. Being a cosigner can have many consequences.
I did some research to see if there were any others who had shared crazy cosigning stories. I came across Learnvest’s article The Mistake That Plunged My Credit Score 200 Points. If you don’t believe me after reading today’s post that cosigning a loan, in general, is a bad idea, I recommend you read that article plus all of the comments on it.
Here’s a little snippet from that article:
It wasn’t until the fall of 2009, when I was thinking about getting satellite television, that I checked my credit report and discovered $10,000 in past due payments. My friend had missed not one, not two, but three mortgage payments!
Another interesting post is one I found on Reddit titled Co-Signing on a loan mistake.
As you can see, there are many who have an unfortunate story to share.
Here’s what you need to know about cosigning a loan.
What is a cosigner?
A cosigner is someone who agrees to be on a loan with another person so that they are more likely to be approved. For example, if your friend can only get a car with a cosigner (either due to them having a low credit score, not making enough money, etc.), then they may ask you to cosign so they can get approved.
However, a cosigner is agreeing to pay off the debt if the original borrower is unable to pay it in the future. So, even if the original borrower doesn’t pay a penny, the cosigner would have to make all of the payments or risk being sued, credit report damage, and more.
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Cosigning a loan may prevent you from being approved for future loans.
If you are thinking about buying a house, car, or something else soon that will need to be financed, you should think long and hard before you decide to be a cosigner on someone else’s loan.
This is for multiple reasons.
One, if the person doesn’t pay the monthly bills on time then you may be rejected for a loan in the future. Missed payments can damage your credit score and your credit report.
Two, your debt-to-income ratio will increase. So, even if your friend/family member pays every single bill on time, your debt to income ratio will increase and this may prevent a lender from approving your loan because they will think you have too much debt on your plate.
Being a cosigner isn’t something you can easily get rid of.
There’s not much you can do to remove yourself from a loan that you cosigned on. If the person isn’t making payments, you are stuck with it for the most part.
The loan would have to be refinanced to get your name off of it in most cases and there are many horror stories out there where the original borrower refused to refinance because then they wouldn’t be able to force the cosigner to continue to pay the monthly bill.
Plus, there are instances in which refinancing is impossible because of values tanking, the economy changing, and so on. So, while the original borrower may want to get you off the loan and refinance, it’s entirely up to the lender.
Cosigning a loan can ruin relationships.
Many cosigning relationships go sour. I have heard of many stories where someone cosigned a loan for someone else and then didn’t talk to them for decades because of a falling out of some sort.
I have always been a firm believer that money and relationships do not mix well. If you are going to cosign or lend money to someone then you should consider it a gift because there is a chance that you will never see that money again.
Cosigning a loan is up to you.
Everyone always feels like all of the cosigning horror stories out there would never happen to them. However, isn’t that how you think all cosigners felt at one time as well?
It’s up to each individual person to decide if they will cosign. However, I want you to remember that if you cosign then you should make sure that you can afford to make the monthly payment.
You never know – one day you may be making them. The original borrower may be a great person, but they may lose their job, have an unexpected expense come up, or something else that prevents them from paying their bills.
Cosigning a loan may not always be bad. However, I believe it’s better to realize what the consequences may be. It’s always better to be prepared!
Would you ever try cosigning a loan and being a cosigner? Why or why not?
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I’ve almost never heard of a good story involving co-signing. In some rare cases, like parents for kids who they feel are responsible enough, are the exception but everything else… no no no.
Yeah, it seems very rare to hear about a good situation!
The only loan I would possibly cosign on is a student loan for my son that I essentially planned to pay off anyway because I plan to pay for his college. When you cosign, you really do have to expect that you will be paying off that loan and if you are not comfortable with that outcome, then you shouldn’t do it no matter how much you love and care for the signer.
Yes, exactly!
Thanks Kalie!
I will *never* cosign on a loan. Even the bible has a verse about not signing on a loan for a friend and getting out of it as quickly as possible. Clearly even back in the day people thought it was a bad idea.
Although my boyfriend’s parents cosigned a car loan for him and he paid it off. Stories like this are so rare.
Just don’t do it is my motto!
Same here!
I would never be a cosigner. I’ve never been asked, but my husband has. We talked about it and we agreed never to do it. My dad had bad experiences with his family members (so my mother says), so I have somewhat became that cautious person.
I would never do it as well.
I’ve heard so many horror stories about this and they usually end in the way you described. I think the only way you can safely co-sign for someone is if you’d be willing to give them that full amount as a gift and not be bitter about it. If it goes into to default, that would be the only way to remedy the situation without trashing your credit, so I think folks need to think through what they would do in that scenario.
Yes, I agree!
When my in-laws had to move in with us, they had no money, had walked away from their home and my FIL was 4 years away from getting even early retirement.
I told my husband that we would NOT be cosigning for a car, no matter what they said. Luckily, he was completely amenable to that. Also luckily, my MIL is content not having a car. She’s already realized just how much would go into a car, insurance, taxes, tickets (my FIL is a terrible driver) and so on.
So I guess one awkward situation has been averted.
Good! 🙂
Co-signing for someone even for your own family is really dangerous. You will never know what will happen next, what if they refuse to pay with the loan?
I agree!
Honestly I don’t think I could be a consigner especially after allt hat I’ve read,It could be dangerus between reations and friendship, what could happen if I would be consigner of my best friend and she never pay a penny of her debt?
Yes, it would be a bad situation!
🙁
Simply don’t do it! I too have heard horror story after horror story. People will not do right when it comes to money.
I agree!
In my early 20’s, I cosigned on a $25,000 student loan for my sister. My mom agreed to back the loan, so I figured it was a no risk situation. As luck would have it, everything that could possibly go wrong went wrong. And most people don’t realize that the lender isn’t required to notify the cosigner that the borrower isn’t making payments. By the time I knew what was going on, the interest and fees had piled onto the loan (it ended up being close to $42,000), and my credit was completely ruined. A decade later, and I’m still dealing with the financial consequences. It’s also taken a tremendous amount of effort to repair my relationship with my sister.
🙁 I’m so sorry.
My parents cosigned my car loan, which I paid off early. I think in the case of family, use your discretion. However, I would never cosign a friend. I don’t even lend my friends money, so cosigning is out of the question for me.
It’s a sticky situation for sure.
Good job!
Yeah, I think it’s pretty horrible for a person to purposely not pay. I don’t know how people do that!