4 Questions to Ask Before Cosigning for a Personal Loan

When someone applies to take out a personal loan, lenders look at their financial credentials like their income and credit score. If those credentials aren't solid, a lender may deny the applicant a loan or only offer a loan at a very high rate.

Many personal loan lenders do allow cosigners, though. A cosigner is another person -- typically with more income and better credit -- who agrees to share legal responsibility for the debt. The cosigner essentially vouches for the primary borrower and protects the lender by giving the lender someone else to collect the money from if the primary borrower doesn't pay.

If a loved one asks you to fill this role and serve as cosigner for their loan, this is a big responsibility you'd be taking on -- and you need to ask a few key questions to make sure that it's the right financial move.

1. Why do you need a cosigner?

The first thing you'll want to find out is why a cosigner is actually needed. See, lenders only ask for someone to guarantee the loan if they have concerns about whether they'll be paid otherwise. And you need to know the source of those concerns.

Say someone needs a cosigner because they've never taken on debt before so they have no credit score, and now they're borrowing to cover a vital medical expense they weren't expecting. That may be a less risky person to cosign for than someone who has terrible credit due to missing a bunch of payments, who is deeply in debt already, and who is taking out a loan to pay off a bunch of credit cards.

It may be uncomfortable to ask someone about their financial situation like this. But they're asking you to put your own finances on the line for them, so they owe you an explanation as to why they're in need of this assistance if they want your help.

2. How much will the monthly payments be?

It's also important to ask how much the monthly payments will be. The big reason for that is to make sure they are affordable for you if you get stuck making them.

More than 30% of loan cosigners end up having to pay back the debt they cosigned for when the primary borrower stops making the required payments. If your own finances would be devastated if you had to take on this obligation, you should say no to cosigning.

This is true even if you expect the primary borrower to be responsible, because there are never any guarantees in life. The person you're cosigning for could become disabled or pass away, and you'd be left with the bill (on top of your grief over what happened to your friend or loved one).

3. How long will the loan repayment period be?

Knowing how long the repayment period will be is also important. That's because the loan will be on your credit report until it is paid off in full. Even if the debt is being paid by the primary borrower, this still could affect your own ability to borrow in the future. Lenders you might want to get loans from will see this one and assume it's one of your payment obligations.

If the personal loan you cosigned for makes your debt look too high relative to your income, you might not be able to get a mortgage or car loan or other loans if you need them for yourself. So, you need to know how long you'll have this obligation impacting you.

4. What's the plan for repaying the money?

Finally, you'll want to make sure the person you are vouching for has a clear plan to repay the money. The payments should be worked into their budget and should be clearly affordable given their current income.

By getting the answers to these four questions, you can make a more informed choice about whether you can take on the risk of cosigning. If you can't afford the payments or if the person asking for this favor won't tell you why they need it, doesn't have a plan to repay it, or is planning to borrow for longer than you're comfortable with, saying no to cosigning may be your only option.