Loan & Credit Cards

What Exactly is the Fuzz When IT Comes to Co-Signing a Loan Your Friend?

co-signing a loan your friend

Have you ever been requested to co-sign a car? It may appear as though you are actually helping someone, perhaps a spouse or a friend. But is it a good decision to co-sign? Well, there has always been a number of reasons why you need not do than there are for the same. There is much more on the line especially in a case where it is a personal loan and the co-signer has to help smoother things.

While you may be helping someone, the manner in which the person carries him or herself may have negative implications on you. In other words, depending on things turn out to be, co-signing a loan can strengthen or weaken your credit score. When co-signing, you always have a higher score than the person you are helping. If co-sign an individual with problems in making payments, you are definitely getting yourselves into problems as far as your credit score is concerned. The worst of the worst can happen when the person fails to submit payments for the loan you have actually co-sign.

Generally, when you co-sign, the loan reflects on your credit reports. Indisputably, you fully responsible for settling the debt just like the individual you have helped even though you do not plan to submit installments. Your credit score helps lenders ascertain the much you can potentially owe and the probability that you will be able to settle the debt you cosign.

With a lot of uncertainties in life, a number of things can happen and render the borrower unable to repay. For instance, one may become a victim of natural disasters such as earthquakes, car accidents or become jobless. All these are unforeseen conditions that can befall anyone. If this happens, the resulting dent burden may it difficult for you to borrow in case you are in need. The following things often affect credit score:

  • The total amount you are borrowing in total
  • The amount you are at present spending from your available credit
  • The number of accounts you have in total with balances. Many credit loans impact your score
  • The amount you are obliged on installment loans.

Co-signing will affect the aforementioned factors negatively. Nevertheless, if you have a solid credit the impact might be reduced. If you do not have a lot of credit history or suppose you have not set accounts yet, you will have to be very careful. All said and done, co-signing can help you establish your credit.

While it is not impossible to take a loan after you have co-signed, the point is, the co-signed debt will lessen your ability to borrow. Lenders examine the likelihood of repaying based on a number of factors along with your credit score. For example, they may want to know the amount your monthly income that is practically available to settle new loans, what is commonly known as debt to income ratio. A debt you co-signed will distort lenders’ view of the much you can manage for your personal loan repayments.

Several loan providers like Bugis Credit can offer you with lending options which also can be different according to the nature of credit seekers they would like to cater. You need to fully understand which provider will give you the most beneficial financial loan answer.

Why You Need To Be Careful

The following top five reasons why should always think twice before decide to co-sign a loan:

It Involves a Lot of Risks But Low Reward.

Co-signing an auto or a mortgage loan may not change a person’s liability. Your credit score improves just slightly from the installments paid monthly. Besides, the fact that you qualified to be a co-signer due to your good score implies you do not require more credit lines. As outlined earlier, a co-signer takes full responsibility if the loan is not paid but can just see an average upgrading in your overall credit score.

You Stand to be Sued by the Lender if the Loan Defaults.

While you may not be the borrower, through co-signing you made the real borrower qualify for the loan. That is why the lender can opt to sue you if the borrower does not obey the obligation.

You May be Required to Sue the Borrower if He or She Default Payment and You the Lender Sues You.

Who likes the idea of suing members of his or her family, or even friends? This is something that destroys friendships and can be better avoided if one chooses not to co-sign. Sometimes bringing the responsible individuals to the lawsuits may be the only way of seeking redress. Suppose it becomes so difficult to bring the guilty party to the lawsuit, you can opt to sue the person a little bit later to contribute towards your monthly installments. Inopportunely, having a judgment against the borrower may be easier compared to making them pay. Nonetheless, you can still seek help from a debt collection attorney.

It May Make Consent to the Loan you Really Need Difficult.

It is imperative to think ahead before making a decision to co-sign because at one point you may personally need a loan. For instance, a consigner of a car loan may not be eligible for a car loan himself because of accumulating a loan already for the same under his name. That is why it is important to acknowledge that co-signing may hamper your very own chances of securing loans however much in need you may be.

Lastly, You Have to Deal with Tax Consequences Following the Settlement of the Debt.

The lender may choose not to get into the problem of suing you and consent to settle the amount owed. That implies that you get tax liability for the resulting difference. For instance, suppose you owe $10,000 and you manage to settle $4,000, you may be required to reflect the remaining $6,000 in debt forgiveness income within your tax returns. Besides, the mark settled rather than settled as agreed may be even more detrimental to your score.


To this end, it is incontrovertible that co-signing a loan is an issue that requires thoughtful consideration. While there some benefits that someone can get, for example, improved credit, the risks associated are just too much. So take time to think about the consequences you may have to deal with before deciding to co-sign.

About Ajeet Sharma

My Name is Ajeet Sharma Financial Blogger & Founder of We are a personal finance blog dedicated to personal finance & financial planners. The main aim of this blog is to help people to informed financial decisions.
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