To co-sign or not to co-sign? Is that the question?

Let’s say your nephew has fallen on hard times, but wants to buy a new car or lease a new apartment. He doesn’t have the credit and financial history to secure the loan or apartment himself, so asks you to co-sign. He promises he will maintain all payment obligations, but just needs you to co-sign to convince the creditor or landlord to lease to him. Should you agree?

Many people agree to co-sign on a loan to help out the primary signer, commonly a close friend or relative. You may be convinced that your friend/relative will keep their word on maintaining payments and will not want to harm you in any way by defaulting on payments, or you might think you’re only helping your friend/relative out but will not be affected beyond signing the agreement. Understand that co-signing will fully bind you to the underlying agreement in the same respect that your friend/relative will be bound. So, in the example above, if your nephew stops making payments on his car, the finance company can hold you liable and sue you for any damages from his default. That means, you could have the negative mark on your credit and have a court judgment against you, subjecting your wages, accounts and property to being garnished to satisfy the court judgment.

Unfortunately, co-signers often don’t anticipate facing any consequences or don’t understand the implications of co-signing. For instance, you may assume that just because you don’t have the vehicle or are not the one living in the apartment for which you co-signed, that you cannot be liable. However, it doesn’t matter that you never enjoyed the benefits of the product or services for which you co-signed. All that matters is that you signed the contract to be bound to all terms along with the primary signer.  Another mistaken assumption is that you can make the creditor go after the primary signer instead. The creditor doesn’t have to, however, and can go after you solely and in full.

You might consider suing your friend/relative (i.e. the primary signer) for defaulting on their promise to make payments in exchange for your co-signing, but oftentimes people don’t want to sue a close friend/relative. Or even if you did sue, since your friend/relative defaulted on the underlying payments, the probability is high that you would struggle to collect on any judgment from him/her anyway.

So, bottom line is to make sure you understand the full risks and implications of co-signing on an agreement before making that commitment.