Whether it’s for your spouse or your child’s student loans, be sure to think twice before co-signing a loan. With many people throughout the country still struggling in the midst of the economic recovery, cosigning a loan presents great risk and little reward. It might seem that refusing to cosign a loan might create personal tensions, but it also ensures financial stability as well. While the choice of whether or not to cosign a loan is ultimately up to you, consider these concerns.
Should Someone’s Debt Become Your Debt?
When you cosign a loan, you’re basically carrying someone’s debt on your shoulders. Should they fail to make payments and default, you are the one responsible. Even if you know they’re capable of paying back the debt, you never know when an unforeseen event such as a job loss could trigger a negative chain of financial events including liability for the credit debt. Reasons to reconsider cosigning a loan include:
1. Lawsuits against you. There are some cases where the creditors file a lawsuit against the cosigner and not the person who actually gets the loan. In one particular case, a client cosigned for her boyfriend and was sued because he stopped making payments. The lender sued her because she was the reason he received the loan in the first place.
2. Destroyed relationships. If there are any financial hardships and you are placed on the hook, this could destroy any type of relationship whether it’s familial or friendship. Remember, financial situations have ruined many families.
3. 100 percent liability. If the other party fails to pay, you are responsible for the whole loan, not just part of it. Are you sure you want to take that risk?
4. Future loan denial. Some people have been denied loans or credit because they cosigned on another loan. Having too much credit under your name can cause the application to be declined.
5. Tax consequences. Let’s say the person who borrowed the loan fails to make the payments. Well, the creditor might not come after you directly through lawsuits or payments. They could also settle the balance owed, meaning that the difference becomes a tax liability for you.