Pros and Cons of Cosigning on a Loan

Cosigning a loan from a private lender can be seen as a very honorable gesture. The biggest reason to cosign for a loan is to help your child be able to afford college. And while cosigning a loan can be incredibly helpful in both the short and long term, it also comes with its risks.

After all, you are putting your name and credit score on the line should your child be unable to afford future payments. As such, there are pros and cons to think about before signing on the dotted line.

Pro: You Can Build Your Own Credit Score

If you utilize a solid financial standing to help the borrower who ends up making payments on time with no issue, it will add to your own payment history. This, in turn, can help boost your credit score. You can receive better loan offers for yourself down the line or get faster approval for things like a new car or house. It also shows potential lenders that not only are you able to handle your own debts, but you can handle the debts of others.

Con: You are Responsible for Debt Obligations

If the borrower is unable to make payments on time, you as the cosigner are entirely responsible for their debt obligations. If you find yourself unable to make these payments, you can suffer big fees and a hit to your credit score. It may also make it hard for you to qualify for loans yourself, as lenders will examine your debt-to-income ratio.

Therefore, it’s important to assess your finances and credit report to see if you can make payments in the future if needed. If you don’t have a lot of money saved up, this could be difficult.

Pro: You Help Someone Out

Of course, the biggest advantage to cosigning a loan is the fact that you are helping your child out with something important to them, which can lead to better things for them in the future. Getting a degree can help your child get a good job down the line, leading to a secure future that also enables them to afford making payments on time.

While this is great news, keep in mind that your relationship could potentially change if they are behind on payments in the future. Should the borrower splurge on other things and miss a payment, you can begin to harbor resentments against them. This could lead to a hefty strain on your parent-child relationship.

Con: You Risk Legal Consequences

In a worst-case scenario, you could risk being sued by the lender if no payments are made at all. Not only will this impact your credit score, but you will also have to face legal fees, which can rack up very quickly.

Even more serious, a court could order you to pay the rest of the debt yourself. If you can’t, you could face bigger issues that can affect you for the rest of your life and lower your standard of living overall.