Why co Signing or Endorsing a Loan is a Risky Business

It may seem at first that the only reason why it is risky to co-sign or endorse a loan is that you are technically leaving yourself open for being responsible for an unexpected and potentially substantial financial obligation at some point in the future. This is of course correct and bad enough but there are equally other considerations which could further exacerbate a very serious situation.

Co-signing or endorsing a loan is where the loan applicant is for some reason not eligible in their own right to take out the loan and requires someone else on a sounder financial footing to guarantee payment of the loan, in the event of their future inability to make the scheduled repayments. The signature on the loan agreement form is legally binding and enforceable in a court of law. In effect, the applicant could immediately default on the loan repayments and leave their personal guarantor in the position of having to repay the full loan. Great care should therefore be exercised prior to entering in to any such agreement.

When you co-sign a loan, you are essentially entering in to a long term financial agreement. It may be that you will never know any negative effects from doing so and that the applicant will repay their loan in full, on time, without assistance. Should this not be the case, however, and the applicant defaults on payments a year or two down the line, you may find yourself in a different financial situation than when you originally signed the loan agreement. This could in a worst case scenario lead to a third party’s debt causing you personally serious financial difficulty. This could also adversely affect your own future credit rating and ability to obtain credit.

Co-signing a loan can also lead to a great friction developing in personal relationships where an applicant subsequently defaults on repayments. If you endorse a loan for a family member or close friend and, for whatever reason, they are later unable to make repayments, the implications can strain the bonds of even what was previously the closest of friendships or relationships. This is another factor which should always be considered carefully in advance.

Co-signing a loan is a risky business in all these ways and more and therefore before you do so, you should not only consider these points but perform your own discreet investigation in to the applicant’s long term ability to make the repayments. Only when you are as satisfied as you can be in all respects should your signature then be added to the loan agreement form.