Co-signing a Loan? You Might Want to Reconsider

Collin LeGall, CPA, CMA, CIRP, LITInsolvency

I am a Licensed Insolvency Trustee with Lazer Grant Inc. and have been assisting people in financial crisis for over 20 years.

One of the most distressing situations that I encounter is when I meet with someone who has co-signed a loan for a friend or family member – only to later discover the true impact of what they did.

When you co-sign a loan, you are committing to pay the entire loan if the primary borrower cannot – or does not – pay.  Co-signing makes you legally obligated to pay the entire balance owing, not just half.  If the primary borrower of the loan can’t/won’t pay, the lender is legally able to pursue you to collect the debt.  The primary borrower also doesn’t have to warn you that the loan is in default.

I have experienced numerous instances where the loan amounts were large enough to force the co-signers to sell their home, to deplete their retirement savings, and even to file bankruptcy.

Co-signing will also adversely affect your credit rating.  Any lender you approach for your own loan may balk at your application because it’s unknown if and when you will be called upon to pay the defaulted loan that you co-signed for a third party.  And in the eyes of a lender this reduces your credit capacity significantly.

So be careful before you agree to co-sign a loan.