How to Say No to Cosigning a Loan
by Christy Bieber | Updated July 21, 2021 - First published on July 12, 2021
You don't have to agree to take on this responsibility.
Cosigning a loan means agreeing to guarantee a personal loan that someone else wants to take out. For example, if a friend asks you to cosign for a car loan, you are vouching for that friend with the lender. What's more, you're agreeing to become legally responsible for repayment of the car loan if your friend defaults. And you're putting your credit on the line because late payments will show up on your credit history.
Most often, people want to get a personal loan with a cosigner if they have no credit or if they have poor credit. As a result, when you cosign a loan, you're agreeing to take on a credit risk that a lender wouldn't take. You could be jeopardizing your own finances by making that choice, so there are very good reasons to say no to cosigning.
But if someone asks you to help them out financially in this way, exactly how can you go about saying no without straining your relationship and causing unnecessary stress? Here are a few suggestions.
Make sure the primary borrower understands the risks
Many people who ask you to cosign don't fully understand the risk they're asking you to take on. They may simply be requesting a cosigner because a lender told them they needed one.
If they aren't aware that you could be on the hook for their debt if they pass away or simply can't pay the bills, then enlightening them about this issue could be enough to get them to reconsider their request.
You can also explain some of the other downsides from your perspective, such as the fact that your own borrowing ability might be affected since the cosigned debt will count toward your debt-to-income ratio. (That's how much debt you have compared to how much money you make.)
Provide a justification -- if you want to
In some cases, you might feel like you owe the person an explanation about why you don't want to cosign. The bottom line is, you really don't have to justify why you don't want to put your finances on the line for them. But doing so can make it easier to avoid anger if the person asking is close to you and you don't want them to feel like you're declining their request for no reason.
You could explain that you're planning to buy a home or car soon, for example, and that the hit to your credit from adding the new debt to your credit report could make your own loan more expensive. Or you could simply say your financial advisor told you not to cosign because of the impact it would have on your finances.
Most people aren't going to expect you to jeopardize your own ability to borrow or live securely just to help them get a loan.
Offer alternatives to help
Just because you aren't willing to cosign doesn't mean that you can't help the person who is asking in other ways.
You could offer to help the primary borrower to shop around for other financing options, such as the best personal loans for fair credit, if they qualify. Or, if they're interested, you could give them some tips on increasing their credit score.
If you have the financial means, you could also offer them a small loan or even a cash gift that might make borrowing easier. For example, you could loan your friend $1,000 to put down on a car, which might make a lender more willing to approve a car loan for the rest. While you'd be at risk of not getting paid back that $1,000, you'd at least be limiting your losses compared with cosigning for the entire loan amount. And you wouldn't put your credit score in jeopardy.
Most people in your life will be grateful for any offers of assistance you're willing to provide, and hopefully, they'll be understanding of the fact that the dangers of cosigning are just too great.
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