Mar 10, 2025
Taking on too much debt can put you on the fast-track to bankruptcy. In 2024, the number of non-business bankruptcies in the U.S. rose to roughly 494,000, marking a 13.9% increase over the previous year.
A personal bankruptcy filing is a serious matter. It can stay on your credit report for seven to 10 years, during which time it can cause your credit score to plummet. And a damaged credit score can make it nearly impossible to borrow money affordably.
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That’s why you should use extreme caution before cosigning a loan. If a borrower isn’t reliable and they fall behind on their payments, as a cosigner you’re on the hook financially. If they fail to pay, your credit score could suffer.
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But what if a close family member is pressuring you? The situation can become emotional very quickly. For example, let’s say your brother asks you to cosign a loan for a luxury car because his credit is in the dumps due to a previous bankruptcy. But to complicate matters, he already has a luxury car and makes more money than you.
It's a challenging situation, and you need to protect yourself.
Your financial security comes first
When you mix family and money, things have the potential to go wrong. A recent FinanceBuzz survey found that 46% of respondents either borrowed or lent $250 or more to a family member — most commonly, a sibling. However, among those lending out money, only 56% got paid back in full.
Meanwhile, 24% of those who lent money to a family member say it hurt their relationship. And only 15% of those who gave a family member a loan said it was a good idea.
Now, agreeing to cosign a loan isn't the same as lending money directly, but you are making it possible for someone else to borrow money.
The problem is that as a cosigner, that loan shows up on your credit report and becomes your financial responsibility. And if a family member is asking you to cosign a loan because their credit isn't strong enough for them to qualify on their own, they may have a history of falling behind on their debts and getting overextended financially. Cosigning a loan could partly put the fate of your credit score in their hands.
That's why it's critical to have an honest conversation with your family member if you're uncomfortable cosigning a loan. Drawing on the brother scenario described earlier, explain that you're uncomfortable with the risk of getting stuck making loan payments. If you’ve previously been burned by loaning money, you could point out that you're wary of a repeat because things didn’t work out well the last time.
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You can also mention that you value your relationship and wouldn’t want to compromise it by entering into any financial arrangement. Make the conversation about you and your financial limits.
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How to help without damaging your credit
There still may be ways to help your family member that don’t involve cosigning and are therefore less risky.
If you have the resources, one option may be to lend the money yourself rather than cosign a loan. The reason? If you give out a loan and it's not repaid, you're out the money. But that won't directly impact your credit. It may be wise in this case to draw up a contract that includes the sum of the loan, the repayment schedule and the amount of interest being charged, if any.
Another option could be to help your family member improve their credit so they can qualify for a loan themselves. That could include helping them build a budget or manage their finances.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
