Sep 1, 2024
Cosigning a loan that creates debt for a friend or loved one is risky enough. Doing so when you have your own debt and shaky credit — that’s when the implications go far beyond a simple signature.
Vouching for a consumer’s creditworthiness is crucial to the loan industry in the U.S., and the ability to borrow for some may hinge on sharing the burden. This can be the top of a slippery slope.
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Let’s say you’re 36 years old with dreams of homeownership but saddled with a car that needs regular maintenance. You’re also dealing with $30,000 of debt and a mediocre credit score. A childhood friend calls with a desperate plea: “Can you cosign a personal loan for me?”
The friendship runs deep, but so does your debt. What do you do when their emergency collides with your own fragile situation?
For someone with significant debt and less-than-stellar credit, this decision could lead to financial disaster, becoming a weight that drags you deeper into the hole. Let’s break down what cosigning really means and why you may want to avoid it.
What it means to cosign
Cosigning isn’t just doing your friend a favor — it’s putting your own financial health on the line. When you cosign, you become just as responsible for the loan as the primary borrower. If your friend misses payments or defaults entirely, the lender will come after you for the money.
In addition, the loan will appear on your credit report, impacting your debt-to-income ratio and potentially lowering your credit score, especially if payments are missed or late. Essentially, cosigning is the same as assuming the loan yourself — with none of the direct benefits.
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Cosigning risks while in debt
If you’re already $30,000 in debt and your credit is average to poor, cosigning a loan can be like playing with fire. Here’s why:
Increased liability: When you’re working through your own debt, adding someone else’s financial burden can be overwhelming. Should your friend fail to make payments, you’ll be responsible for covering them, which could stretch your finances beyond their limit.
Credit score impact: Cosigning could further damage your score if your friend misses a payment. Any missed payments will show up on your credit report, making it even harder to improve your financial standing.
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Effect on creditworthiness: Lenders scrutinize your credit history when assessing any future loans or credit applications. Cosigning could make you appear risky and impact your ability to apply for more credit.
The potential benefits of cosigning
Despite the risks, cosigning isn’t all bad — if done under the right circumstances.
You may strengthen your relationship by helping a trusted friend during a time of need. If they consistently make payments on time, it can help them build on their credit history while solidifying your own, and both credit scores benefit.
Having another account in good standing on your credit report may offer a slight boost – if all goes well.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Alternatives to cosigning
If cosigning feels too risky, there may be other ways to help your friend without placing too much risk on your financial health.
Your friend may be able to qualify for a smaller loan on their own or find lenders who specialize in high-risk borrowers. In addition, rather than cosigning, consider becoming a co-borrower. This means you’ll share responsibility for the loan but will have more control over payments and loan terms.
Also, you can look into peer-to-peer lending platforms or credit unions, which may offer more flexible loan terms for someone with limited credit history.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
