Subscribe

When is it okay to cosign a loan?

Cosigning can be a touchy subject, with most people advising against it. It puts you at risk with out much recourse if the other party stops paying. However, there might be some time when cosigning is a good idea.

  • close
    Rita Cheng, 45, a certified financial planner, poses for a portrait with her children Sarina Haryanto, 16, left, Karolina Haryanto, 7, and Christian Haryanto, 13, at their home in Potomac, Md., on Wednesday, May 2, 2012. A CFP may not recommend cosigning a loan, but there might be some reasons to cosign.
    Jacquelyn Martin/AP/File
    View Caption
  • About video ads
    View Caption
of

Cosigning a loan is, generally speaking, a bad idea. That's because you place your own credit at risk and could be responsible for the entire amount of the loan if the other party fails to pay. There are horror stories aplenty of people who cosigned loans for friends or family members — or even just acquaintances — and found themselves in debt and with their credit ruined.

But there may be cases where placing your name on another person's loan is acceptable, provided that you're clear on the risks. It's not uncommon for parents to cosign loans for children as they look to get established, for instance. Ultimately, cosigning a loan is a personal choice, but it's important to be aware of the downsides.

With those words of warning out of the way, here are some times when cosigning a loan may be okay:

Recommended: Top ten highest rated CEOs of 2015 are not the ones you would expect

1. If You Think of the Loan as a Gift

It's often said that if you lend a friend or relative $500, just treat the $500 as simply a gift. If you're comfortable giving the money away, then lending it is okay, because you won't worry about getting the cash back. Similarly, when cosigning a loan, operate under the assumption that you will be the one paying whatever is owed — because you might very well end up the person on the hook. If you're comfortable with this, then go ahead and cosign.

2. If It's for a Child's Education

Student loans can be hugely beneficial to a young person, and parents may feel compelled to help children obtain the necessary financing for higher education. You may feel it's worth the risk to help your child in this way, and you may not even mind helping your child pay the loans backlater. (It may be better, however, to simply help them pay through a 529 plan or similar savings if you can.) If you feel strongly about a child's educational funding needs, cosigning a student loan can be wise — provided you believe the child understands the responsibility of repayment.

3. If You're Helping a Family Member Build Credit

When you're young, building credit can be a bit of a chicken or egg problem. You can't build credit until you show you're able to pay back loans, but it's hard to get a loan without a credit history. Cosigning a loan for a young person can help them gain financial independence over time.

4. If You're Helping a Loved One Buy a Car So They Can Work

It's often hard for young people to land a good job if they don't have reliable transportation. But they may not have the means or credit history to purchase a car. Cosigning a car loan for this person could make it easier to land that job and earn income of their own. Just make sure the car they buy is affordable; borrowers shouldn't assume monthly payments disproportionate to their income. And frankly, you shouldn't cosign a loan you can't afford, either.

5. To Help a Family Member Secure Safe Housing

I once had a friend who graduated from college and moved to a new city, but wasn't earning a lot of money right away. It was hard for her to secure an apartment in a safe neighborhood because she didn't have much income, credit history, or savings. Ultimately, her father was willing to cosign an apartment lease to ensure she could live in a nicer building. Her dad took a risk, but he rested easier knowing his daughter was comfortable in her new city.

6. If You Know You Won't Need a Loan for Yourself Anytime Soon

When you cosign a loan, you put your own credit score at risk. But this only matters if you plan to borrow money in the future. If you have plenty of money in the bank and own your home and car free and clear, a ding on your credit may not impact you very much. Just be sure you have an emergency fund in place to protect against job loss, disability, and other unexpected problems.

7. If You've Agreed With the Lender to Certain Protections

It is sometimes possible to negotiate certain conditions with a lender when cosigning. For instance, you can insist that you be notified immediately if there are any late payments. This gives you a chance to intervene before the tardiness shows up on your credit history. You may also be able to get the lender to agree that you will only be responsible for the principal of the loan.

8. If It's for a Short Term

There may be ways to remove yourself as a cosigner after a time. For instance, you could ask to have your name taken off when a borrower chooses to refinance a home loan. If you are a cosigner on a credit card, you could have the borrower apply for new credit cards under his or her name only, then close the old accounts. If you can, it makes sense to try and remove yourself as a cosigner after 12 months or so, when a borrower presumably has the credit to stand on their own.

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK