When is it okay to cosign a loan?

Cosigning can be a touchy subject, with most people advising against it. It puts you at risk with out much recourse if the other party stops paying. However, there might be some time when cosigning is a good idea.

|
Jacquelyn Martin/AP/File
Rita Cheng, 45, a certified financial planner, poses for a portrait with her children Sarina Haryanto, 16, left, Karolina Haryanto, 7, and Christian Haryanto, 13, at their home in Potomac, Md., on Wednesday, May 2, 2012. A CFP may not recommend cosigning a loan, but there might be some reasons to cosign.

Cosigning a loan is, generally speaking, a bad idea. That's because you place your own credit at risk and could be responsible for the entire amount of the loan if the other party fails to pay. There are horror stories aplenty of people who cosigned loans for friends or family members — or even just acquaintances — and found themselves in debt and with their credit ruined.

But there may be cases where placing your name on another person's loan is acceptable, provided that you're clear on the risks. It's not uncommon for parents to cosign loans for children as they look to get established, for instance. Ultimately, cosigning a loan is a personal choice, but it's important to be aware of the downsides.

With those words of warning out of the way, here are some times when cosigning a loan may be okay:

1. If You Think of the Loan as a Gift

It's often said that if you lend a friend or relative $500, just treat the $500 as simply a gift. If you're comfortable giving the money away, then lending it is okay, because you won't worry about getting the cash back. Similarly, when cosigning a loan, operate under the assumption that you will be the one paying whatever is owed — because you might very well end up the person on the hook. If you're comfortable with this, then go ahead and cosign.

2. If It's for a Child's Education

Student loans can be hugely beneficial to a young person, and parents may feel compelled to help children obtain the necessary financing for higher education. You may feel it's worth the risk to help your child in this way, and you may not even mind helping your child pay the loans backlater. (It may be better, however, to simply help them pay through a 529 plan or similar savings if you can.) If you feel strongly about a child's educational funding needs, cosigning a student loan can be wise — provided you believe the child understands the responsibility of repayment.

3. If You're Helping a Family Member Build Credit

When you're young, building credit can be a bit of a chicken or egg problem. You can't build credit until you show you're able to pay back loans, but it's hard to get a loan without a credit history. Cosigning a loan for a young person can help them gain financial independence over time.

4. If You're Helping a Loved One Buy a Car So They Can Work

It's often hard for young people to land a good job if they don't have reliable transportation. But they may not have the means or credit history to purchase a car. Cosigning a car loan for this person could make it easier to land that job and earn income of their own. Just make sure the car they buy is affordable; borrowers shouldn't assume monthly payments disproportionate to their income. And frankly, you shouldn't cosign a loan you can't afford, either.

5. To Help a Family Member Secure Safe Housing

I once had a friend who graduated from college and moved to a new city, but wasn't earning a lot of money right away. It was hard for her to secure an apartment in a safe neighborhood because she didn't have much income, credit history, or savings. Ultimately, her father was willing to cosign an apartment lease to ensure she could live in a nicer building. Her dad took a risk, but he rested easier knowing his daughter was comfortable in her new city.

6. If You Know You Won't Need a Loan for Yourself Anytime Soon

When you cosign a loan, you put your own credit score at risk. But this only matters if you plan to borrow money in the future. If you have plenty of money in the bank and own your home and car free and clear, a ding on your credit may not impact you very much. Just be sure you have an emergency fund in place to protect against job loss, disability, and other unexpected problems.

7. If You've Agreed With the Lender to Certain Protections

It is sometimes possible to negotiate certain conditions with a lender when cosigning. For instance, you can insist that you be notified immediately if there are any late payments. This gives you a chance to intervene before the tardiness shows up on your credit history. You may also be able to get the lender to agree that you will only be responsible for the principal of the loan.

8. If It's for a Short Term

There may be ways to remove yourself as a cosigner after a time. For instance, you could ask to have your name taken off when a borrower chooses to refinance a home loan. If you are a cosigner on a credit card, you could have the borrower apply for new credit cards under his or her name only, then close the old accounts. If you can, it makes sense to try and remove yourself as a cosigner after 12 months or so, when a borrower presumably has the credit to stand on their own.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to When is it okay to cosign a loan?
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2015/1204/When-is-it-okay-to-cosign-a-loan
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe