You may get far more than you bargain for if you co-sign a loan for a friend or family member.
Acting as a guarantor on another person's debt is surprisingly common, but it frequently leads to unanticipated problems such as lower credit scores and damaged relationships, according to a new study from CreditCards.com.
Almost four out of 10 co-signers told CreditCards.com they had to pay some of all of the bill because the primary borrower did not. Another 28 percent said their credit score dropped because the borrower either paid late or skipped out on his payment.
It may be no surprise that about one-quarter of co-signers said the experience harmed their relationship with the person they co-signed for. It most cases, that person is a relative, such as a child or spouse.
"If you're going to co-sign, you have to be aware there's a good chance you'll lose some money or damage your relationship," said Matt Schulz, senior industry analyst at CreditCards.com. "Anytime you're mixing money with family and friends, things can get dicey pretty quickly."
People might want to co-sign for another person for several reasons. Parents may want to co-sign for their adult child's first car, for instance, since that can help the child get a lower interest rate. About one in six U.S. adults have so-signed a loan or credit card for another person, with auto loans representing the most common type of co-signed debt.
Auto loans make up 51 percent of all co-signings, followed by personal loans at 24 percent and student loans at 19 percent. Credit cards represent about 16 percent of co-signings.
Roughly half of the co-signings were done on behalf of a child, while one out of five were on behalf of friends. Another 14 percent are for spouses or partners, while 7 percent are for parents. The remainder of the co-signings are divided between grandchildren, siblings, or boyfriend or girlfriend, with each at 6 percent.
Before agreeing to co-singing a loan, consumers should talk through what they expect of the primary borrower and ask for clarity and updates on the state of their loan repayments, Schulz said. For instance, ask for the primary borrower to send a PDF of a statement each month that shows the loan is being paid off.
"If you ask me to co-sign on an account with you, I fully expect that you will pay those bills," Schulz said. "If the other person doesn't pay the bills, it really is a breach of trust, and you can see where that would cause some real damage to a relationship."