Three weeks before Christmas, my fiancée was in a car accident that totaled her car.
Fortunately, she wasn’t hurt (🙌🏾), the police determined the other driver was at fault and her insurance premium didn’t increase as a result of the collision. Unfortunately, she was now carless at the same time we were planning a wedding.
As we began the daunting task of looking for her new ride, we realized whatever auto loan decision she made would affect us both for years to come. Once we exchange vows, we plan to merge our bank accounts. For better or worse, her bills become mine and mine, hers. Whatever car payment she got, I’d inherit, too.
When she started gathering quotes from various lenders, we quickly realized my higher credit score would yield a much better interest rate, a lower payment and a more secure financial future. So, I asked myself: should I co-sign on her loan?
Most financial experts will advise you to never co-sign on a loan. Co-signing makes you just as equally responsible for the debt as the borrower. The debt appears on your credit report, meaning it will affect your credit score. If the primary borrower can’t make payments, and you’re unable to take them on yourself, both your credit scores can tank. Lenders can even sue you, the co-signer, if the debt goes unpaid.
If you’re considering co-signing, ask yourself these important questions before you agree — even if the person you want to help is your beloved friend, relative or future spouse.
Can this person be trusted?
Trust means everything when co-signing because the co-signer typically isn’t the one making payments on the debt. Instead, you’re hitching your credit to someone else’s financial tendencies. If the borrower has a habit of reneging on promises or mismanaging their money, you might want to think twice before you sign your name on the dotted line.
What will happen to your own financial health?
Don’t neglect to think about your own financial wellbeing. How will co-signing affect you in the long-run? Will adding that person’s debt onto your credit report help or hurt your score? Can you afford to potentially take a short-term hit on your score? Do you plan to make any significant purchases in the near future that rely on a good credit history, such as buying a house? Will co-signing make your financial life easier or more difficult?
What do you get out of it?
Without a doubt, co-signing benefits the primary borrower: Your higher credit score helps them qualify for rates they wouldn’t get on their own. But you should think about personal benefits, too. To be frank, there aren’t many, aside from the satisfaction of helping someone important to you. Also, if you have a pretty solid credit history, adding another debt type to your mix of credit could raise your score a bit.
Will the relationship sour?
Co-signing is fraught with financial and emotional risk (the two aren’t mutually exclusive). The borrower’s failure to repay their debt — and inadvertently damage your credit in the process — can cause serious harm to the relationship. Even if the borrower is responsible and manages the debt well, your friend, relative, etc., is, in essence, indebted to you. That could change your relationship dynamics and, if you’re not careful, cause a lot of resentment.
Will the borrower’s situation improve?
If you’re considering co-signing, chances are, it’s because you want to help someone you love or care about. Your name on the loan could motivate them to repay the debt in full and, as they make consistent, on-time payments, their own credit situation may improve. In the process, they’ll practice financial discipline and, ideally, employ better money management habits in the future.
What’s the worst that could happen?
Your credit score could plummet. You could fall into a cycle of debt. A lender could sue you. And you could hinder your ability to qualify or apply for other loans in the future. Those are all bad things, so ponder co-signing carefully before you assume those risks.
Is co-signing the only option?
There could be other ways to assist your friend or loved one if you feel uncomfortable with giving them a hard “no.” You could borrow the money yourself and lend it to the person needing your help. You can use LendingTree’s online marketplace to help your loved one find rates they do qualify for. Or, you can help with a down payment, which may help the borrower qualify for a loan and better rate.
So, what did I do?
I co-signed on my fiancée’s loan; we got a pretty good rate and satisfactory payment. Then, I took what I’ve learned as a LendingTree employee, and did some comparison shopping. My bank offered me a much better rate if I became primary borrower on the loan, but still added my fiancée to the car title.
So, that’s what we did. Taking out the loan boosted my credit score a few points (win!) and gave my fiancée a reliable car with an affordable payment (double win!).
Although we didn’t need a co-signed loan in the end, I trust my fiancée implicitly and had no doubt she would make on-time payments.
But every situation is unique; agreeing to co-sign may not be a smart idea for you. Weigh the pros and cons and consider the potential ramifications to your relationship with the person needing your help.