PhotoBefore you co-sign for a loan, consider this: in a new study, 38% of the people co-signing on a loan had to pay some or all of the debt because the principal borrower was unwilling or unable to.

When you co-sign on a loan, you are essentially a second borrower. You are guaranteeing the loan will be repaid, and have as much responsibility for paying it as the primary borrower.

The study, by CreditCards.com, also showed that 28% of co-signers suffered a dent in their credit score as a result of helping out a friend or family member. Not surprisingly, 26% of co-signers said the experience ended up damaging their relationship with their co-borrower.

The study found consumers rarely co-sign loans for friends. In most cases it is a family member, such as a child or step-child.

Not a very good bet

"With a 38% chance of losing money and a 26% chance of damaging a relationship, co-signing doesn't sound like a very good bet," Matt Schulz, CreditCards.com's senior industry analyst, said in a statement. "If you absolutely have to co-sign, then at least be aware there's a sizable chance you'll lose some money and or get your feelings hurt."

Here's what you should know before co-signing a loan. If you have a good credit score and your co-borrower does not, the lender will look more favorably on the application, with a good chance it will be approved. But if the co-borrower has a lousy credit score, you need to understand the reason for that.

Is there a history of missed payments or irresponsible spending? It is important to know that because, if you co-sign and the other person misses a payment or two, the amount of the debt and the missed payments can become part of your credit history.

Only 17% of adults have co-signed

CreditCards.com found only about 17% of consumers report having co-signed on a loan – most likely because of a heightened awareness of the pitfalls. Those who do are most likely trying to help a family member take a big financial step, such as purchasing his or her first car.

If you do decide to co-sign for a family member, it is important to stay in close contact with that person. Without being obtrusive, stay clued in to his or her financial situation.

Before agreeing to co-sign, have a frank conversation with the co-borrower, making clear that you have a very real stake in a successful outcome and urging your co-borrower to let you know right away if there is any danger he or she will fall behind in the payments.


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