Your friend or loved one is asking you to cosign his loan, and you're wondering what to do. It might seem easy but it's not that straight forward.

Pros

Your Friend Gets the Needed Loan:  Maybe it's for a car and now you don't have to drive them everywhere, or a tool they need to perform their work. Whatever the need, they get the loan and you get the satisfaction of helping.

Building or Repairing Credit:  If all the payments are paid on time, everyone wins. Both the signer and the cosigner's credit scores will improve.

Cons

Bank policies vary as do loan contracts but here are some of the likely disadvantages.

Lenders Can Sue the Co-Signer First:  When the lender notices that payments are late or not being made, they usually contact the primary borrower first. If that doesn't work, the lending institution has several options: work with the debtor, force the sale of collateral or sue the original debtor or co-signer. Banks are businesses, not charities, and often make a purely business decision, and follow whichever course of action will satisfy the debt expediently.

Your Credit Score Is At Risk:  Any late payments (s)he makes are now on your credit record too.

Your Own Loan May Get Rejected:  When lenders make loans they often consider your debt-to-earnings ratio. Most institutions will consider the monthly payment of the co-signed loan in your debt ratio just as if you were making the payments, because someday, you might have to.

Personal Relationships Are at Stake:  Declining to co-sign will likely make less impact upon the relationship than if you have to be tough when someone becomes ill or loses a job and becomes unable to make timely payments.

Changing Circumstances Can Accelerate The Note:  While it's rare, and depends on the contract, lending institutions can require immediate full repayment of a loan under a variety of circumstances, even if loan payments are up to date. Examples would include any loss of the collateral, (fire, flood, theft, etc.) or the death of either signer.

►FOR MORE INFORMATION

Advantages & Disadvantages of a Cosigner
Top 10 Reasons not to Co-sign on a Loan
Will Cosigning Hurt My Credit?
Co-Signing - Before You Co-Sign a Loan