Top 5 Reasons Why You Shouldn't Co-Sign a Friend's Loan - SmartAsset

Co-signing your friend’s loan might seem like a nice thing to do. But it can put many things in your life at risk, including your finances, your credit score and even your friendship. While it’s possible to co-sign a friend’s loan and never face any negative consequences, it might not be worth it. Check out five reasons why you shouldn’t co-sign a friend’s loan.

1. You’ll Be Responsible for the Loan

No matter how trustworthy or wonderful your friend may be, he might end up defaulting on the loan he took out. Anything could happen. Your friend could lose his job or find out that a relative needs help paying for medical treatment.

If your friend can’t pay back the money he borrowed, you would have to pay for the loan if you co-signed it.

2. Your Credit Could Take a Hit

If you co-sign a friend’s loan and he misses a single loan payment deadline, your credit score could drop. If that happens, it might be harder for you to buy a house or get a low interest rate on a loan in the future.

If your friend fails to pay back whatever he owes, the lender might sue you first. In the lender’s eyes, you are far more likely to pay back the loan since your credit score is probably higher.

3. Your Property May Be at Risk

Sometimes a co-signer will secure a loan with his or her own property. If you (the co-signer) put up your car or house as collateral and your friend doesn’t pay back the loan, you could potentially lose your property.

4. You Could Destroy Your Friendship

If you’re forced to cover the cost of the loan you co-signed, you could end up resenting your friend. After all, it can be difficult to remain friends with someone who put you in a complicated financial situation.

5. It Could Be Harder to Get a Loan Later On

Co-signing your friend’s loan could make qualifying for another loan more difficult. For example, if you co-sign your friend’s car loan and then you try to take out a personal loan, a lender might reject your application. Co-signing your friend’s loan will affect your debt-to-income ratio (the amount of debt you’re paying off compared to your monthly gross income). A lender might not want to lend money to someone who already has a lot of debt to pay off.