If you’ve ever been asked to co-sign a loan, you should take plenty of time to mull over the implications before making a decision. While saying “no” likely comes with its own set of repercussions — especially if the person holds a grudge against you — saying yes could impact you in a variety of notable, negative ways. Below are some of the ways co-signing a loan could go wrong.
Your credit could tank. When you co-sign, the loan and the payment history shows up on your credit report. If the person you’re signing for misses a payment, it will impact your credit rating simultaneously with that of the person you’re co-signing for. Additionally, immediately following the action of co-sign, your credit will likely take small a hit because of the lender’s “hard pull” — or inquiry into your credit report. If you were planning to take out a loan yourself, you might want to think twice before co-signing for this reason.
You could get sued. As USA Today reports, in some states, if the lender doesn’t receive its payments, they could sue you. Of course, this is usually a last resort for most lenders. By the time they make this move, multiple payments have been missed and your credit will already be hurting. Still, if the lender does sue, you’d be on the hook for everything — from back payments to associated legal fees.
You might have to make a tough personal decision. If the borrower is missing payments on the loan and is endangering your financial health, it will put quite a strain on your relationship. To say the least. One way to prevent things from going south is to maintain good communication with the borrower. Keep everything transparent so everyone understands exactly where they stand.