Should you cosign a loan for your child or a loved one? A guide to risks and rewards

Is your child or another loved one struggling to qualify for a car, home or other personal loan? Cosigning on their loan could help them get approved, but it’s also a risky move.

Older adults tend to have better credit scores and more financial stability than their children and younger relatives. If you have good credit and steady income, you could potentially step in as a cosigner and help a loved one get approved for a loan, or even help them qualify for more affordable terms.

The downsides, however, include potential damage to your finances, your credit and your relationship.

What does it mean to be a cosigner?

When you cosign on a personal loan, you agree to be fully legally liable for someone else’s debt. Cosigning might seem akin to giving a character reference, but it’s a far more serious commitment: You’ll take on all the same responsibility for payments as the borrower, without any of the privileges.

For the main borrower, the benefit of having you cosign on a loan is that your good credit and financial stability help them qualify. You may even help them get approved for a student loan, car loan or mortgage where they were already rejected for any of the following reasons:

• Insufficient income

• Bad credit

• No credit history

• Excessive debt

For the cosigner, the main benefit is intangible — the opportunity to help out a loved one — while the drawbacks are more material.

When the main borrower can’t pay, you’ll be responsible for sending money to the lender. If the primary borrower misses just one loan payment, your credit scores can tank. And if the loan goes into default, around 75% of creditors will come after you for the money first.

Pros and cons of cosigning a loan

Cosigning on a loan can help your child or loved one qualify for more favorable rates and terms than they could on their own, helping them with necessary purchases or to save on high-interest debt. But you’ll want to weigh the potential for financial and personal drawbacks before signing any dotted line.

Dig deeper: Do credit scores matter after you retire?

When to consider cosigning a loan

As the cosigner, you’re putting your finances and credit on the line. So the main borrower should be willing to openly discuss the arrangement, answer all of your questions and show you documents to verify their situation.

There’s no way to totally safeguard yourself against credit and financial damage as a cosigner, but you’ll be safer if all of these conditions are met:

• You have a long-term relationship with the primary borrower.

• You’re willing to be liable, even if the relationship changes before the loan is paid off.

• You can afford to pay 100% of the loan on your own without having to borrow from your retirement, emergency savings or another savings account.

• You’re not planning to retire or undergo a big financial change before the loan payment ends.

• You understand the reason the main borrower was denied a loan and how they plan to remedy the problem.

• You’ve reviewed the main borrower’s credit reports and confirmed they don’t have a recent history of missed loan or credit card bills.

• The main borrower has shown you their budget and plan for paying back the loan.

Dig deeper: How personal loans work — and what to know before you apply

When to avoid cosigning

In past studies, around 40% of people said they regretted cosigning on a loan, often because they had to cover some of the debt. You can avoid a decision you’ll regret by saying “no” if the situation doesn’t feel right. Any one of these conditions is a good reason to decline:

• You have a fixed or limited income and can’t afford the payments on your own.

• You’re confused about the arrangement or you’re being pressured to cosign.

• You plan to apply for your own loan shortly after cosigning.

• Your loved one has a checkered financial past and shows no signs of improving.

• The main borrower refuses to show you their budget, credit reports, pay stubs or other documents to confirm their situation.

Alternatives to cosigning for a child or loved one

If you’re uncomfortable cosigning on a loan, but still want to help, consider offering another type of assistance. Here are some alternatives.

Gift fund

Cosigning on a mortgage for your child or grandchild is probably less common than you think. In fact, less than 4% of buyers under 35 have a coborrower who’s 55 or older. Cosigning can also be counter-productive, since the lender sets the loan terms based on the lowest of the two applicants’ scores.

Instead of cosigning, you might offer your family member a “gift fund,” or a cash gift to use for their home purchase. By doing this, you help them increase their down payment and qualify for more loans without putting your credit on the line.

Informal loan

Offering your loved one a loan from your savings lets you set a limit on your assistance without risking credit damage or lender’s fees. Of course, it’s difficult to ensure you’ll get the money back. According to a 2022 survey of people who had loaned someone money, 42% did not get repayment in full.

One way to formalize and enforce the terms of the loan is to draw up and sign a loan agreement, which can be used if you decide to pursue repayment with legal action in small claims court.

Make them an authorized user

If your family member has low or no credit scores, another way to help is to add them to your credit card as an authorized user. When you do so, your account information appears on their credit reports and can positively affect their scores. Additionally, the authorized user does not have to have their own card for the account and can’t be held liable for the credit card debt you accrue.

FAQs: Cosigning on loans and more

Learn more about your responsibilities as a cosigner before helping out a child or loved one with these common questions.

Can I be released from a loan I cosigned on?

It depends on the lender and type of loan. Some lenders allow borrowers to apply for cosigner release after several years of on-time monthly payments and a credit check to determine the main borrower can take on the loan without your support. Check with your lender to learn whether release is a possibility and the steps for removal from the loan.

What happens if the primary borrower doesn’t pay a loan I cosigned on?

If the main borrower defaults on a loan you’ve cosigned for, the cosigner is responsible for paying the loan. Missed payments will show on your credit report, pulling down your scores. And if you’re not able to repay the loan amount, you may be sent to a collection agency or, in some cases, sued in small claims court.

For auto loans and other secured loans, the lender can eventually take back ownership of the collateral — for example, the vehicle — leaving you on the hook for the unpaid balance and associated repossession fees.

What happens to loan debt when a cosigner dies?

What happens to the debt depends on your lender and type of loan. Generally, lenders won’t change the terms or conditions of a loan if a cosigner dies before the debt is fully repaid, and the main borrower becomes responsible for the entire loan. For student loans, it greatly depends on the loan — for example, federal Parent PLUS loans discharge the debt when a cosigner (or parent) dies, while private student loans may require full payment immediately after the death of a cosigner. Learn more about cosigners and how state laws affect personal loans in our guide to loan debt and death.

I cosigned a loan for my spouse and we’re now seeking divorce. Am I responsible for any unpaid debt?

Yes. Cosigners are responsible for any unpaid loan debt, no matter your relationship with the main borrower. If a creditor or lender can’t get the money from the main borrower, they will come after the cosigner.

In fact, if you live in one of nine community property states, you may be responsible for a spouse’s unpaid debt even if you’re not a cosigner. Talk with an attorney specializing in divorce or matrimonial law to learn more about how marital debt is divided in your state. If money is a barrier, you might be able to find low-cost or free legal help through your local bar association.

Does refinancing a loan require a cosigner?

You aren’t required to have a cosigner to refinance a loan, but a cosigner can help if you’re not able to get approval on your own, whether due to poor credit or a risky borrowing history. A cosigner can also improve your chances for lower loan rates and better terms than your original loan. If your original loan also had a cosigner, you can ask if that person is willing to cosign on your new loan or find another cosigner who is.

Sources

About the writer

Sarah Brady is a finance writer and educator who covers a wide range of topics, from personal and small business credit and loans to financial scams. Her expertise has been featured in Yahoo Finance, Forbes Advisor, CNN, Fortune, Investopedia and other top media brands. As an NFCC-certified credit counselor, Sarah taught workshops on money management and coached thousands of clients on how to improve their credit. She is also a former HUD-certified housing counselor and educator for the City of San Francisco’s affordable homebuyer programs.

Article edited by Kelly Suzan Waggoner