What should I take into consideration before I co-sign for a loan?

Co-signing for a loan can have a more significant impact on the co-signer than is commonly realized, so it will pay in the long run to be very cautious. Co-signing a loan really means that you are a co-borrower. So late payments and/or defaults on this loan can negatively affect your credit, as well as the borrower you’re trying to help. While the lender will not usually make demands for payment from the co-signer unless the borrower defaults, by law they can make those demands at any time.

According to finance companies, most co-signers end up having to pay back not only the principle and interest on defaulted loans, but also legal and late fees that are added on. It can be quite an expensive exercise in experience, not to mention a negative impact on the co-signer’s credit.

If you decide to co-sign a loan, request that the financial institution issuing the loan agree not to collect from you unless the primary borrower defaults. And if the primary borrower does default, try to negotiate that your liability be limited to the unpaid principal, and not any late or legal charges. This may absolve you of an additional financial burden, but it will not prevent the negative impact on your credit if payments are late or if the loan goes into default.

A better option, if you can work it out, may be to provide the borrower with a secured credit card. Using the card responsibly could build up their own credit history, limit the risk of taking on a debt too large to handle, and keep from placing both of you in financial danger.