Help to others could bring financial harm to you.

It can be difficult to obtain a loan if you do not have an adequate credit history. Your income may be sufficient, and you may have no delinquent bills, but lenders want to see a history of paying bills on time and in full before they can be comfortable lending money to someone. That can be a problem for a young adult who wants to buy a car, though. How do you obtain a loan if no one will give you one?

One solution is to get someone with established credit to co-sign on the loan for you. Simply put, the loan will be backed by the good credit of the co-signer. You get the loan, you get to make the payments, and both you and the co-signer get the loan added to your credit history when the loan is repaid. It sounds like a win-win situation, doesn’t it?

Maybe, and maybe not. It could be good for the borrower, but it frequently turns out to be a disaster for the co-signer. Studies show that with nearly 75% of all loans with a co-signer, the borrower defaults. What happens then?  What happens then is the that the co-signer is now completely responsible for the loan. You read that right: completely responsible.

When you sign on the dotted line as a co-signer for a loan, you are telling the lender that you will, in event of default by the borrower, take complete financial responsibility for the loan and that you will repay it in full if he or she should default.

If you should decide that the loan is “not your problem” because someone else is the borrower, think again. You are legally responsible; that’s what your signature said. Lenders can sue you, take your wages or even put a lien on your property in order to collect their money.

Before you agree to co-sign on a loan, you should consider a few things. Who is the borrower? Is it someone you know well? Are they someone that you trust to repay the loan? If the borrower is someone that you know has a history of responsibility, then perhaps signing on the loan might be an OK thing to do. If they are someone who has a history of not being responsible, but you think that this loan will help them become that way, you might be taking a risk.

What about your own finances? Can you afford to repay the loan if the borrower defaults? Don’t automatically assume that this will not become an issue and that the loan is the borrower’s problem. When you sign, you agree that the loan is your problem. That means that you need to decide if you can afford to repay in the event of a default. If your own finances will not support doing that, then you should reconsider.

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