Why You Shouldn't Co-Sign on a Loan

Credit isn't exactly easy to come by these days. And if you happen to have a good credit score, there's a chance that sooner or later you'll be approached by a friend or family member and asked to co-sign on a loan or credit card for them. By doing so, the person with poor or limited credit is able to leverage your positive score for a better interest rate. But is credit a win for you, the co-signer, as well?

The answer: Not necessarily. While you agreeing to be a co-signer is likely done with nothing but good intentions, the outcome could turn out to be far from favorable for you. We're talking a decreased credit score, collection agencies coming after you and even potential lawsuits. Here's a closer look at why you should think twice about co-signing on a loan:

Lower credit limit: Like we said in the opening, credit is limited these days. So if you co-sign on a loan, you're debt ratio might get too high. Not only is this unfavorable for your financial situation - after all, you're responsible for the debt - but it can lower your overall score, resulting in credit repair to get your score back up to what it was.

Missed payment: Is the person you're co-signing for reliable? We ask because if the person misses a payment, the collection agency can come after you for it. It's not what a lot of people have in mind when they agree to co-sign, but unfortunately it becomes a common reality. You need to be vigilant and protect your credit score, anyway possible.

Lawsuits: As a co-signer, you're just as responsible for the debt as the other signee. So if the other signee defaults on the loan payment, you could potentially be sued for the amount owed.

Simply put, if we're offering credit tips, we'd advise you to co-sign with caution. If you're approached by a reliable person who has a limited credit history or finances or you are trying to help out your child with his or her first car loan, that's one thing. But if you're approached by someone you know is shady and unreliable, that's a whole different story. So co-sign with caution - because if you're not aware of the consequences, you could end up on a lengthy quest to repair credit and enact a debt management plan to cover for someone else's blunder

By Nikitas Tsoukalis