Your brother, sister, child, uncle, aunt – whomever – needs your help and asks you to cosign on a loan. They promise to make the payments, they just need you to cosign on the loan. So what’s the harm? They will make the payments and you want to help out your family, right?
Let’s unpack cosigning a loan—because it sounds helpful (and it can be), but it also comes with some serious strings attached.
What it means to cosign:
When you cosign a loan, you’re not just vouching for someone—you’re legally promising to pay the loan back if they don’t. You’re equally responsible for the debt. It’s not just moral support; it’s legal and financial accountability.
Ramifications:
1. You’re 100% liable.
If the primary borrower misses a payment, the lender will come to you expecting payment. If they default, you could be on the hook for the full amount. It’s not a 50% thing.
2. Your credit is affected.
The loan shows up on your credit report too. Any missed or late payments affect your score, not just theirs. Even if payments are made on time, your debt-to-income ratio changes, which could make it harder for you to get your own credit in the future (like a mortgage or car loan).
3. Your borrowing power goes down.
Lenders will see that loan as your responsibility. That could limit how much you can borrow for yourself—even though you’re not actually using that money.
4. You might damage the relationship.
If things go south—like the borrower can’t or won’t pay—it can create tension, resentment, and even permanent damage to your relationship. This is especially tough with family or close friends.
5. Collections and legal action are possible.
If the loan goes into default, the lender can pursue you for payment. That might mean debt collectors, lawsuits, wage garnishment, etc.
So when might it make sense?
If you trust the person deeply, they have a stable income, and they truly need your help to get started (think: student loans, first car loan), it might be worth the risk. But even then, it’s a decision to take slowly and seriously.
Establishing credit
There are ways for people to start with credit. There are credit cards that are “secured.” For example; you go to a bank or credit union and you sign up for a secure credit card. You make a deposit for, say $300, and they give you a credit card with a limit for $300. Your deposit secures the card balance. You use the card and pay on time and in time, you are establishing credit.
