My sister asked me to co-sign her car loan in 2018. I love my sister. I said yes without really thinking about it. Six months later, she lost her job, missed three payments, and my credit score dropped 87 points. We didn't speak for four months. The loan eventually got sorted out, but it nearly wrecked both our finances and our relationship. If someone you love is asking you to co-sign, please read this before you answer.
When you co-sign a loan, you're not just vouching for someone. You are legally, fully, 100% responsible for the debt if they can't pay. Read that again. It's not a character reference. It's not a formality. If the primary borrower stops paying, the lender will come after you for the full balance. It goes on your credit report. Late payments hit your score. If it goes to collections, that's on YOUR record. The lender doesn't care about your relationship -- they care about getting paid, and you signed a legal document saying you'd make sure that happens.
Here's something most co-signers don't realize until it's too late: the loan appears on your credit report as if it's your own debt. That means it affects your debt-to-income ratio. If you co-sign a $25,000 car loan for your nephew and then try to get a mortgage six months later, that $25,000 counts against your DTI. I've heard from people who were denied mortgages specifically because of a co-signed loan they'd completely forgotten about. The primary borrower was making all the payments on time, but the debt was still there on the co-signer's report.
So why do people co-sign? Usually because someone they care about can't qualify on their own -- a young adult with no credit history, a family member rebuilding after bankruptcy, a spouse with income but damaged credit. The motivation is almost always love or obligation. And sometimes it works out fine. But you need to go in with your eyes open, not your heart leading the way.
If you decide to co-sign despite the risks, protect yourself. First, make sure you can actually afford to make the payments if the borrower can't. If their $400/month car payment would break your budget, don't do it. Second, set up alerts so you're notified immediately if a payment is missed -- don't wait for a collections call to find out. Many lenders allow co-signers to set up payment notifications. Third, get it in writing (between you and the borrower, separate from the loan agreement) how you'll handle missed payments and when you'd expect them to refinance into their own name.
Ask about co-signer release provisions. Some lenders allow the co-signer to be removed from the loan after the borrower demonstrates a track record of on-time payments -- usually 12-48 months. This is important because it gives you an exit strategy. Not all lenders offer this, and those that do have strict requirements. But if it's available, it should absolutely be part of your decision-making process.
Alternatives to co-signing that I wish I'd known about: helping the borrower build credit first (add them as an authorized user on your credit card, help them get a secured card), helping with a larger down payment to reduce the loan amount, or connecting them with lenders that specialize in thin-file or credit-building loans. These options help without putting your credit and finances directly on the line.
Look, I'm not here to tell you never co-sign. My sister and I worked it out, she got back on her feet, and the loan is paid off. But I went into it blind, and the consequences were real and painful. If someone asks you to co-sign, take at least 48 hours before answering. Run the numbers. Consider the worst-case scenario -- not because it will definitely happen, but because if it does, you need to be prepared for it financially and emotionally.
