Helping out a family member or close friend by co-signing a loan usually feels like the right thing to do since you’re lending a hand to someone you care about. This could be to help them reach a financial goal or just get out of a tight spot—it’s quite generous! But before you put your name on that dotted line, you should know what you’re getting into because co-signing comes with plenty of hidden pitfalls. Here are eleven downsides you should consider before making your decision.
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Hard to Remove Yourself from the Loan
It’s quite hard to get your name off the loan once you’ve co-signed and even if circumstances change or the borrower improves their credit, you’re still legally tied to the debt—right until it’s paid off. The lender isn’t obligated to release you and worst of all, refinancing isn’t always an option. You’re stuck with the responsibility, which is quite frustrating during those times when you need to free up your credit.
Credit Score Risks from Missed Payments
Any missed payments by the primary borrower may hurt your credit score as credit agencies treat the loan as if it’s yours—so late or missed payments show up on your credit report. This could drop your credit score by quite a bit and make it harder for you to get credit cards or other loans in the future. You may not even know about the missed payments until the damage is done.
Difficulty Securing Your Own Loans
Co-signing may increase your apparent debt load as it makes it harder to get loans for yourself—lenders look at your debt-to-income ratio when you apply for credit. The co-signed loan will be on your record so you might seem overextended financially, which could lead to higher interest rates. You might even be denied loans for things you need, like a new car or home improvements, because you helped someone out.
Legal Responsibility and Possible Lawsuits
The person you co-signed for could stop paying at any moment and if that happens, you’re legally on the hook for the debt, so the lender will come after you for the remaining balance. If you’re unable to pay, they’ll sue you and this will lead to court judgments, wage garnishments or even liens on your property. You could end up facing legal battles you never anticipated, even though it’s technically not your fault.
Potential Tax Consequences
But that’s not all because if the loan defaults and the lender forgives the debt, you could face unexpected tax bills because the IRS may treat the forgiven amount as taxable income. As such, you’ll owe taxes on money you never actually received and this surprise could catch you off guard during tax season. It adds a lot of financial stress you didn’t anticipate when you agreed to help.
Tension in Personal Relationships
Money issues strain relationships and co-signing is no exception—any problems that arise with the loan will likely lead to arguments & hurt feelings. You might feel resentment from being stuck paying for someone else’s debt, while they might feel uncomfortable, destroying your relationship. These tensions may damage even the best of family ties or friendships that took years to build.
No Control Over How the Loan is Used
You have no say in how the borrowed money is spent as a co-signer, meaning that your loved one might use the funds irresponsibly and that increases the risk of default. For example, they might take out a loan for education but spend it on a vacation instead—such a lack of control is quite frustrating. Whatever choices they make could impact your financial standing so keep that in mind.
Complications for Your Estate
You never know what the future might hold in store for you and if something happens to you, co-signed debts become part of your estate so your heirs might have to deal with the outstanding loan. This could reduce the inheritance you intended to leave them and they might face legal obligations to settle the debt. It makes an already difficult time even more stressful for your loved ones.
Changes to Loan Terms Without Your Knowledge
The primary borrower might modify the loan terms without telling you, such as refinancing or extending the loan, which increases your liability because you’re a co-signer. These changes could affect you financially but you might not find out until much later when you’re strapped with unexpected obligations. Nobody wants to have to deal with sudden financial surprises down the road.
Risk of Identity Theft
Sharing personal information during the co-signing process could expose you to identity theft if people don’t handle your documents securely. As such, your Social Security number & other sensitive data could be compromised—someone could use this information to open fraudulent accounts in your name. This will lead to all sorts of financial issues and potential losses that just don’t seem worth it.
Emotional Stress and Health Issues
Let’s not forget about how being responsible for someone else’s debt causes significant stress, as worrying about whether the borrower’s making payments could create anxiety or sleep problems. The added pressure will likely affect your mental and physical health, which will take a toll on your overall well-being. It could also affect your relationships with others, even if you don’t want it to.
Disclaimer: This list is solely the author’s opinion based on research and publicly available information.
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