Don’t cosign that loan

Econoblogger Megan McArdle explains why cosigning on a partner’s or relative’s loan is almost always a very, very bad idea:

I mentioned in my last post that cosigning loans is risky.  How risky?  According to the FTC, depending on the type of the loan, as many as three out of four primary borrowers default on their obligations, leaving the cosigner to pay.  This is, after all, why they need a cosigner: they’re not good credit risks, either because they have too much debt already, or because they don’t pay their bills on time.
If you think that they really need the money, and that you’re not just helping someone dig themselves even deeper into financial irresponsibility, then my advice is to just give them the money.
Give them the money?  I can’t possibly afford to do that!
Well, my friend, given the default rates of primary borrowers, that is what you’re doing when you cosign–with the additional cost of origination fees, interest payments, late fees, collection fees, a black mark on your credit report, and probably, a destroyed relationship.
When the primary borrower defaults, you’re on the hook, not just for the loan, but for any late charges or collection fees that may have accrued.  If it’s a car, the repo man will sell it for cheap at auction, and then sue you for the difference–there are no “non-recourse” auto loans.  Meanwhile, your credit will be trashed.  Contracts don’t always include notice requirements for the secondary borrower, so you may not even find out about late payments until it’s in collections.
Even if they pay, the full amount of the outstanding loan will be counted against your debt-to-income ratios for the purposes of both calculating your credit score, and obtaining loans for yourself, since after all, you are responsible for paying it off.  That may hamper your ability to get a mortgage or other financing.
If you can’t afford to pay off the loan, then–no matter how much you love them, how great your need, or how much you want to believe they will pay–you must “just say no”.
Read the whole thing.  After the breakdown of a common-law relationship, debts accrued by either party are not necessarily divisible – but it seems like every such case I’ve worked on involves one party co-signing a loan for his or her ex, and now finding out the hard way that they’re on the hook for it.

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