Should you co-sign a loan? Here are the pros and cons you need to know about

Getting a co-signer for a loan can be a smart move if you're worried about qualifying for funding. Many lenders allow borrowers to apply with a co-signer for this reason.

When you co-sign a loan, you agree to take responsibility for paying back the loan if the primary borrower falls behind or is unable to keep making payments. Because you legally share the responsibility for paying back the loan, there are some upsides and significant potential downsides to consider before signing your name on the dotted line.

Improving your credit score

Being a co-signer on a loan could potentially help your credit score in a few ways. For one, it can help contribute to your credit mix, which accounts for 10% of your credit score. Your credit mix is a measure of how diverse your lines of credit are and shows lenders you can handle different types of debt.

And if the original borrower of the loan consistently makes their payments on time and in full, you can also reap the benefits of their positive credit habits. This is because payment history makes up 35% of your credit score, so the borrower's good payment habits can significantly elevate your credit score over time.

It could potentially damage your credit score

On the flip side, if your borrower misses payments or makes late payments, your credit score could potentially take a hit since you also hold financial responsibility for the loan.

A rough experience could damage your personal relationship

If something goes awry during the repayment period — like, your borrower misses a payment or is unable to keep making payments — tensions could rise between the two of you since not repaying a loan can have negative consequences for everyone involved.

In extreme cases, this could mean losing the relationship. But even if nothing goes wrong during the repayment, simply acting as a co-signer can add pressure to your relationship since you're depending on someone else to not make a mistake and jeopardize your own financial situation.

You could be on the hook for paying back the rest of the loan

Worst case scenario, if your original borrower is unable to pay back the loan, you'll have to step in and make payments since you're a co-signer. Not only can this make you feel frustrated and further strain your relationship, but the payments could also add pressure to your monthly budget.

Your decision to be a co-signer can come down to several factors including your relationship with the borrower, your understanding of the borrower's financial circumstances and ability to pay, your credit score, the size of the loan and even your own ability to repay the loan if needed.

Before deciding to be a co-signer, carefully weigh these variables. It's also important to consider the terms of the loan that your borrower is accepting because you'll be held to those very same terms as well.

Some favorable loan terms to look out for can include, but aren't limited to, no prepayment penalties and no late fees. This way, the borrower won't be penalized for paying off the entire loan early and won't accrue an additional charge for making a payment late.

SoFi and LightStream are two solid loan lenders because neither charge a prepayment penalty or late fee. They both offer funding amounts of up to $100,000 for qualified borrowers and flexible payment term options — SoFi offers loan terms as long as 84 months and LightStream offers terms as long as 144 months.

Co-signing a loan is a well-intentioned gesture, especially when your goal is to offer help to a loved one who's accepting the loan. But both the potential upsides and downsides need to be considered since the negative ramifications of your borrower falling behind on payments can pose a cost to both of you.

Because of this, be sure to consider important factors like the size of the loan and the borrower's ability to pay the loan back. Also, remember that you'll be on the hook for the same terms of the loan so make sure you're comfortable with them as well.

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