Co-Signing for a Loan: Good or Bad Idea?

signing contractHas someone you know recently asked you if you would be willing to co-sign with them on a loan? If so, you might be unsure of what, exactly, a co-signer is and what you are getting yourself into. Serving as a co-signer on a loan can be a good thing, but it’s not for everyone. This is a quick guide to what a co-signer is and why you might or might not want to be one.

What is a Co-Signer?

As the name suggests, a co-signer is someone who signs their name for a loan alongside the other applicant. Just as with any contract that you sign, you will be required to ensure that the contract is upheld. In general, when you serve as a co-signer, however, it is understood that the other party will be the one who both benefits from the loan (such as being the one who drives the car that is being purchased with the loan, in the instance of a car loan) and who satisfies the loan.

Why Would Someone Need a Co-Signer?

Different lenders have different requirements when it comes to co-signers. In many cases, you will be basically required to qualify for the loan yourself. For example, if you are thinking about co-signing with someone on a car loan, you will be expected to qualify for the loan yourself, such as by having a good credit score and making enough of an income to cover the car payment in case the other individual does not pay.

Some lenders are not as strict, however. For example, if you are looking to help out an adult child who is looking to buy a car, the lender might accept his or her income as being sufficient to qualify for the car loan, but it might require someone who has a good credit score to also sign.

What You’ll Need to Co-Sign on a Loan

In most cases, you will need the same things to co-sign on a loan as you would need if you were applying for a loan yourself. For example, you will generally need to be able to prove your identity and provide your social security number so that a credit check can be ran on your information. Additionally, you may need to bring in proof of your income (such as paycheck stubs, tax forms or bank statements) as well as a list of references. In most cases, you will be required to be present in person to sign for the loan. If it is more convenient for you and the other person who is applying, you may be able to meet with the lender at separate times to sign your own portion of the paperwork.

The Perks of Being a Co-Signer

These are a few reasons why it can be a good thing to be a co-signer:

  • For someone who has a low credit score, having a co-signer can be the only way to qualify for some loans. For example, if you would really like to help an adult child purchase a vehicle that he or she might not be able to purchase alone, serving as a co-signer can be a good move.
  • If you help someone get a loan by serving as a co-signer, the loan could actually help you improve your credit score, as long as the person pays the payments on time.

The Disadvantages of Being a Co-Signer

Even though being a co-signer can be a positive thing in some ways, it can be quite risky, too. These are some of the disadvantages of co-signing on a loan:

  • If the person who is getting the loan does not make his or her payments on time, your credit score could be negatively affected. To avoid this, you might have to step in and make payments yourself.
  • Co-signing on a loan can affect your debt-to-income ratio. If you are planning on applying for a mortgage, for example, having an extra loan on your credit report could make it more difficult for you to qualify, since it can look like you have more monthly financial obligations and more debt than you actually have.
  • You may have to worry about being contacted by the lender in regards to the loan, which could serve as an annoyance.

As you can see, co-signing for a loan can be a positive thing, but it is not something that you should take lightly. Instead, you should carefully weigh the pros and cons and only do it for someone who you trust and who you think is responsible enough to make the payments on time every month, if you do choose to take the risk.