3 Reasons Why You Should Never Cosign a Loan

Updated July 2026

If your parents, grandparents, or maybe a sibling cosigned a loan for you when you were starting out, you may feel that it’s your obligation to give back and help a fellow family member. Cosigning a loan is a selfless gesture, and you no doubt appreciate the help extended to you. But the reality is far more complex than gratitude alone.

When you cosign, you’re not just lending your name. You’re taking on a financial liability that can ripple through your credit history, debt-to-income ratio, and long-term financial stability. While banks like Chase and credit unions often encourage cosigning as a way to help people build credit, the risk is entirely on you.

Consider this: the Consumer Financial Protection Bureau (CFPB) warns that cosigning is “like signing a mortgage for someone else.” The lender doesn’t care who benefits, the law treats you as equally responsible.

1. You Are Legally Liable, Even If You Don’t Benefit

When you cosign a loan, you’re not a silent observer. The bank will require your presence at the closing. You’ll sign documents, often multiple copies, confirming that you’re jointly responsible for the debt.

According to Regulation Z, cosigners are legally liable for repayment. This means if the primary borrower stops paying, the lender can come after you, even if you never touched the money.

And unlike the primary borrower, you may not even have legal rights to the asset. If it’s a car loan, for example, and the borrower defaults, the lender can repossess the vehicle, but you have no ownership stake, even if you’ve been making the payments.

SoFi, a major online lender, explicitly states in its terms: “A cosigner is equally responsible for the loan. If the primary borrower fails to pay, the cosigner is legally required to pay.”

A standard 60-month new auto loan in 2013 averaged around 4.5% interest, according to the Federal Reserve’s G.19 report. On a $20,000 loan, that means a monthly payment near $373. Let that sink in for a moment. If you cosign and the borrower makes one year of payments on time, then stops, the remaining balance would be roughly $16,200. That is not a distant hypothetical. 1 in 5 cosigned auto loans goes delinquent within three years. The arithmetic is clear: you could suddenly owe a five-figure sum for a car you never drove.

Even worse: if the borrower files for bankruptcy, you’re still on the hook. The bankruptcy doesn’t erase your obligation.

2. Your Debt-to-Income Ratio Takes a Heavy Hit

Every loan you take, or cosign, increases your debt-to-income (DTI) ratio. This is a key metric used by lenders like Experian and TransUnion to assess creditworthiness.

Under the Federal Reserve’s G.19 report, a DTI above 36% is considered risky. Cosigning can push your DTI into that zone, even if you’re not directly using the funds.

For example: if you cosign a $20,000 auto loan with a $350 monthly payment, your DTI increases by $350 per month, regardless of your income. This can make it impossible to qualify for a mortgage, even if you’re otherwise creditworthy.

Put a face on that number. Suppose you earn $50,000 a year and your sibling, with a 605 credit score, asks you to cosign a $12,000 personal loan. The lender sets a $250 monthly payment. Without the cosign, your DTI sits at a comfortable 29%. With it, you jump to 37%, above the standard lender threshold. Your plan to buy a home in two years suddenly hits a wall, all because of a loan you never spent a dime of.

A 2013 study by the CFPB found that cosigners are nearly twice as likely to be denied credit for their own loans compared to non-cosigners, even with similar FICO Scores.

And here’s the catch: lenders don’t just look at your current DTI, they look at your entire credit history. Even if the debt is paid off, the fact that you cosigned for five years can still appear on your report for up to ten years.

3. You Have No Control Over the Outcome

You may believe you’re helping someone build credit. But you’re also handing over your financial future to someone else’s choices.

Even if the borrower pays on time, the loan remains on your credit report for years. The Experian blog explains that cosigned accounts stay on your report for up to 10 years after the last payment.

But what if the borrower falls behind? The Federal Reserve reports that 1 in 5 cosigned auto loans become delinquent within three years. And once a payment is late, it can be reported to all three major credit bureaus: Experian, TransUnion, and Equifax.

Once that happens, your FICO Score can drop by over 100 points, a collapse that can take years to recover from. A score below 600 makes it nearly impossible to get a mortgage, auto loan, or even rent an apartment.

And here’s the worst part: you can’t remove your name from the loan without the borrower’s cooperation. The only way to get released is through refinancing, where the primary borrower takes over the loan in their name alone.

But refinancing isn’t easy. According to a 2013 Experian report, only 40% of borrowers who cosigned were able to refinance without a cosigner. That means 60% remained on the hook, sometimes for years.

And if the borrower defaults, you may have to pay the full amount. For example, if a $25,000 auto loan goes unpaid, you could owe that entire sum. That’s not a “favor”, it’s a financial liability.

Frequently Asked Questions

Can I cosign a loan without harming my credit?

No. Even if the borrower pays on time, your credit report shows the loan, increasing your DTI and potentially blocking future credit. The CFPB confirms that cosigning “creates a debt obligation that is reported to credit bureaus.”

Can I get my name removed from a cosigned loan?

Only if the primary borrower refinances the loan in their name alone. The lender must approve this, and the borrower must qualify. According to the CFPB, this process is “often difficult” and not guaranteed.

Does cosigning help the primary borrower’s credit?

Yes, but only if payments are made on time. The account will appear on their credit report and can help improve their FICO Score. But it also exposes you to risk, and the benefit doesn’t outweigh the cost for most cosigners.

Can cosigning affect my ability to get a mortgage?

Yes. Lenders use DTI ratios to assess risk. If your DTI is too high due to a cosigned loan, you may be denied even with a strong income. The Federal Reserve reports that cosigners are 2.3 times more likely to be denied a mortgage.

What happens if the borrower dies?

If the borrower dies, you’re still responsible for the debt unless the loan has a death benefit clause. Most personal loans do not. In that case, your estate may be liable. The FDIC notes that cosigners are not protected in the event of a borrower’s death.

Can a lender force me to pay if the borrower defaults?

Yes. Cosigners are legally bound to repay the debt. Lenders can pursue you directly. The CFPB warns that “cosigners are not protected from liability.”

Is cosigning ever safe?

Only in rare cases, like a parent cosigning for a child’s first car loan with a fixed, short term. But even then, the risk remains. As Megan McArdle puts it: “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, **must** just say no.”

Can a cosigner sue the primary borrower?

Yes, but it’s costly and rare. You can sue for reimbursement, but collection is difficult. The borrower may not have the funds, and legal fees can exceed the loan amount. Most experts advise against this path.

Do all lenders report cosigners to credit bureaus?

Yes. All major lenders, Chase, SoFi, Capital One, and others, report cosigned loans to Experian, TransUnion, and Equifax. The Experian blog confirms this is standard practice.

Can I cosign for someone with bad credit?

Yes, but it’s risky. The lender may approve the loan because of your strong FICO Score. But if the borrower defaults, your score will suffer. Even a single late payment can trigger a drop. The Federal Reserve notes that cosigners with strong credit are more likely to face damage.

Still, there is a narrow exception worth stating plainly. If you could write a check for the entire loan balance today and not miss the money, cosigning a small, short-term note is mostly a paperwork nuisance. The problem is that the typical cosigner sits nowhere near that position. The CFPB’s data shows that most cosigners are family members with moderate incomes, stepping in because the borrower’s credit is too thin or too bruised to qualify alone. Their own finances often cannot absorb a default without real pain. If that describes you, the risk is not theoretical.

What You Can Do Instead

If you want to help someone build credit, there are safer alternatives:

• Co-borrower accounts with shared access and responsibility, like a joint savings account.
• Secured credit cards where the borrower deposits funds as collateral.
• Financial education through free resources like the CFPB’s Financial Wellness Guide.
• Small personal loans through institutions like Alfred or Ally Bank, which offer education and repayment tools.

Instead of cosigning, consider helping the borrower improve their credit score first. You can guide them through tools like FICO’s credit monitoring or free reports from AnnualCreditReport.com.

And remember: a true favor isn’t a financial risk to yourself. It’s helping someone grow their skills, not their debt burden.