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Read This Before You Cosign

If you've gotta do it, here's how to lower your risk

Perils of Co-signing Loans

Alamy

Thinking of cosigning a loan for a friend of loved one? There are better options.

En español |  Here's some good money advice: Don't cosign someone else's loan. A new survey from CreditCards.com shows that 38 percent of cosigners lost money because the primary borrower whiffed, 28 percent saw their credit score drop, and 26 percent said their relationship with the primary borrower soured. Yet there are times—when your freshly minted college grad needs to lease an apartment, for example—when there don't seem to be other options. In fact, there often are.

Buying a car

Helping the borrower with a larger down payment instead of the financing itself can eliminate the need for a cosigner in some cases. A letter from a borrower's employer that outlines terms of salary can also help. Or consider an inexpensive used car. Cars are more reliable than they used to be, even used ones.

If you choose to cosign, make sure your name is also on the title. You're taking the same risks as the primary borrower so you should have the same rights.

Borrowing for education

With the exception of PLUS loans, cosigners aren't usually required for federal student loans. So max out those before looking at private ones, says Dan Macklin, cofounder of SoFi, a firm that refinances student loans. Note, too, that some loan contracts allow for the release of a cosigner if the primary borrower makes a certain number of payments on time. If you do cosign, ask the student to plan to refinance the loan to eliminate your obligation as soon as he or she has an income, Macklin says.

Leasing an apartment

First-time renters can often get an apartment without a cosigner by subletting or by becoming a roommate in an apartment that already has a primary tenant.


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