What Are the Pros and Cons of Co-Signing Loans?

Co-signing loans can have significant implications, both positive and negative, for the co-signer. A co-signer bears responsibility for the loan's repayment if the primary borrower fails to make timely payments, which may require him to pay the balance of the loan with little recourse for getting his money back from the primary borrower. In addition, if the borrower defaults on the loan, the co-signer's credit standing may be at risk. By cosigning a loan, a person can also assist a friend or family member financially without actually having to use her own money to do so.

For many people, co-signing loans is risky business. By acting as guarantor, a co-signer risks liability for loan repayment, even though he does not receive any benefit from the borrowed money. In many cases, a co-signed loan is needed because a borrower does not have sufficient assets or credit to obtain a loan on her own. While in some cases the borrower's financial situation may simply be the result of being young, not having a high income, or simply not having been able to establish a strong credit history, there are occasions in which a co-signer is required because the borrower has a history of making poor financial decisions. In such situations, co-signing loans presents a significant gamble for the co-signer, as there is no guarantee that the borrower will demonstrate financial responsibility, particularly when he has not done so in the past.

The consequences of a loan default on the part of the borrower can be devastating for a co-signer. Not only may the lender seek repayment from the co-signer, but the lender can report the default to credit reporting agencies, damaging the co-signer's credit. If the co-signer fails to make good on the loan, the lender can take him to court.

On the other hand, co-signing loans can be a positive way for people to assist members of their family and social circle in achieving their financial goals. There are instances in which individuals would like to assist friends and family but do not have the assets to directly loan them the funds. As a loan co-signer, a person can provide financial assistance without having substantial assets or dipping into her savings. Another positive aspect of co-signing a loan is that the loan may appear on the co-signer's credit report. If the borrower fulfills his obligation and makes his loan payments on time, the co-signer's credit can actually improve.