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Is It Ever Worth Asking Family to Co-sign a Loan?

Asking family to co-sign puts your relationship up as potential collateral should something go wrong.

We’ve all heard the shtick about millennials. Highly ambitious. Highly educated. But very, very indebted. The mix makes for an optimistic but often risk-averse generation.

It’s a sweeping generalization, but there is some truth to the buzz. Financial wariness is evident in the way millennials interact with banks, with credit cards, and with real estate. In addition to these shifting behaviors, The Atlantic recently reported, millennials are also saving less than ever before. Less saved for a down payment, less experience with the housing market … does this doom my generation to a houseless future?

Not in the slightest.

But as millennials gear themselves up for their big entrance into the real estate market, it’s crucial that our generation equips ourselves with the proper financial knowledge to succeed in our housing ventures. First up: understanding what it means to co-sign on a loan. More importantly, understanding if co-signing on a loan with a family member is worth the risk.

What does it mean to co-sign a loan?

When you co-sign a loan, you enter into the loan agreement along with another participant. While you may be the one making payments, the co-signer will be required to adhere to the terms of the loan and ultimately holds legal responsibility in the case of default.

Why would someone consider including a co-signer?

Adding a co-signer to a loan bulks up your financial “authority.” If you have little to no credit history (or maybe in the case of housing, an underwhelming down payment), having a co-signer can help lock down a loan that would have previously been denied. Because co-signing with someone who has a strong credit score or substantial savings boosts financial stats, lenders see it as taking on less risk and are therefore more likely to offer a loan.

What are the risks of co-signing with a family member?

Scour the Web using the search term “co-sign with family members,” and you’ll be flooded with horror stories ranging from defaulted loans to tanked credit scores to all-out family brawls. Despite best intentions, unresolved money issues can be a huge catalyst for tension. Beyond the emotional side of money, there are also very real legal consequences for the co-signer should you fail to make payments or default on your loans.

Their credit will be negatively impacted.

They will be held accountable for a defaulted loan.

Debt collectors will target them to collect on any unpaid debt.

Essentially, a co-signer is legally responsible for any consequences. That’s quite the risk to take indeed.

The truth of the matter is, life happens. Unexpected financial changes may completely topple your financial plan and, unfortunately, your payments won’t magically stop being due even if you’re struggling financially. That’s a stressful challenge in itself. Now imagine the compounded stress of seeing a family member’s financial situation suffer as a consequence.

Before taking on a co-signer, ask yourself these questions:

  • Have you truly explored all your options (different lenders or rearranging your payment timeline to allow you to go it alone)?
  • What are the repercussions for a co-signer should you face financial hardship?
  • What’s your plan of action should you face financial hardship?
  • If you’re still a few years away from homeownership, what steps can you take to build up a down payment?

Nobody enters into a loan with the intention of defaulting or missing payments. However, unexpected emergencies or hardships can quickly turn these intentions into false promises. It may sound cheesy, but family matters! Asking family to co-sign puts your relationship up as potential collateral should something go wrong.

Bottom line: Is it worth asking a family member to co-sign a loan?

The choice is ultimately up to you. But as with every financial decision, it’s crucial that you put in the proper time to research, carefully weigh the pros and cons, and explore all your options before making your decision. We millennials may be an optimistic bunch, but when it comes to large financial decisions, a critical eye is an empowering tool!