When an applicant’s credit does not qualify them for a loan, obtaining a cosigner with good credit can help get the loan accepted. Cosigning a loan may appear simple—it only requires a signature, after all—but it is a serious commitment with big ramifications if things go wrong.

If you’re thinking of cosigning to help a family member or friend get a loan, weigh the pros and cons first, both for yourself and for the borrower. By thoroughly understanding what you’re signing up for, you may be able to avoid future problems.

When you cosign a loan, you add your good name (and credit) to the application and agree to share equal responsibility for the account. If the borrower is unable or unwilling to pay, you agree to make the payments. Cosigning a loan indicates that the loan will appear on your credit report. You’re also putting your credit at risk if the borrower fails to make payments on time, and you could be charged late fees.

Meanwhile, cosigning a loan does not give you any of the loan’s proceeds. You do not own any property purchased with the loan.

What is a Co-signer?

A co-signer is someone who adds their name, credit history, and financial information to the primary borrower’s loan application, agreeing to be legally responsible for the loan amount and any additional fees if the borrower is unable to repay.

Most people desire or need a co-signer because they cannot qualify for the loan on their own. If you have a solid financial profile, co-signing with someone with a lower credit score or thin credit profile can increase their chances of qualifying or receiving a reduced interest rate.

Unlike a joint loan, in which both borrowers have equal access to the loan, a co-signed loan gives the co-signer no claim to the money, even though they may be responsible for repayment.

Pros of Cosigning a Loan

Most of the benefit for cosigning a loan goes to the borrower, who may be able to take out a loan and secure a more favorable interest rate by adding a cosigner to their loan application.

However, there are a few pros for you, the cosigner:

You’d Be Helping Someone in Need

The primary benefit of being a cosigner is helping a friend or family member in need. For example, you want to help your kids get a start in life or help a friend re-establish credit after going through a difficult financial time. Cosigning a loan for someone you love could make it possible for them to buy their first home, buy a much-needed car or refinance high-interest debt at a more affordable rate.

It Could Help Improve Your Credit

Cosigning can have a positive effect on your credit, as long as the loan is repaid successfully. Because you’re equally responsible for the loan, the account will add to your credit report. On-time payments will contribute to your payment history and the presence of the loan could improve your credit mix, which could reflect positively on your credit.

Cons of Cosigning a Loan

Cosigning a loan can have a detrimental impact on your credit and borrowing capacity, regardless of whether payments are made on time. Additionally, if you get into difficulty, your relationship with a friend or family member may deteriorate.

Here is a quick list of potential cons that cosigners should consider:

It May Hurt Your Credit

Any problems the borrower has with the loan may be reflected on your credit report, including late payments, collections and repossessions. Any of these can lower your credit score and may stay on your credit report for seven years.

If you’re thinking about cosigning a loan, you may want to check your credit reports and score beforehand: You’ll need good credit to be an effective cosigner. You may also want to consider credit monitoring, so you’ll be alerted to changes in your credit file when they happen. That way, if problems begin popping up, you can address them early on with the borrower.

You May Limit Your Borrowing Power

Lenders compare the total amount you earn each month to the total amount you owe—your debt-to-income ratio (DTI) —when considering you for a loan or credit. Monthly payments for loans you cosign are included in this calculation. Even if you’re not making the monthly payments on a cosigned loan, it can affect your borrowing power as if you are.

You May Have Trouble Opting Out

Removing yourself from a loan you’ve cosigned can be difficult. Lenders may need to re-qualify the borrower using their own credit in order to remove your name from the loan. Alternatively, the borrower may have to refinance or pay off the loan to extricate you from the arrangement.

You May End Up Paying the Loan Yourself

If your friend or family member can’t repay the loan, you are on the hook. Depending on the loan amount and how much has already been repaid, this could mean taking on an additional mortgage payment every month—or assuming a mortgage-sized debt.

You May Strain Your Relationship

Having to take over monthly loan payments and/or a large debt puts an obvious strain on a relationship. But even if problems never come to this, cosigning may add a level of dependency that’s problematic. You may (justifiably) worry about the borrower’s financial status and whether they’re paying their bills on time. If your loved one misses a payment by mistake or runs into financial difficulty, you may feel angry or betrayed—adding to the stress of an already tense situation.

Risks of Co-signing a Loan

Co-signing on someone else’s loan puts you in a uniquely vulnerable position. Here are the risks to consider.

1. You are responsible for the entire loan amount

This is the biggest risk: Co-signing a loan is not just about lending your good credit reputation to help someone else. It’s a promise to repay their loan if they are unable to do so, including any late fees or collection costs.

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Before you co-sign, assess your own finances to ensure you can cover the loan payments in case the primary borrower cannot.

2. Your credit is on the line

When you co-sign a loan, both the loan and payment history show up on your credit reports as well as the borrower’s. The lender’s hard credit check during the loan approval process will temporarily lower your credit score by a few points.

Most importantly, though: A missed payment by the borrower can negatively affect your credit score. Since payment history has the biggest influence on credit scores, a misstep here can wreck your credit.

3. Your access to credit may be affected

The long-term risk of co-signing a loan for your loved one is that you may be rejected for credit when you want it. A potential creditor will factor in the co-signed loan to calculate your total debt levels and may decide it’s too risky to extend you more credit.

Your debt-to-income ratio — the percentage of your monthly income that goes toward existing debts — is a major factor on many credit applications.

4. You could be sued by the lender

In some states, if the lender does not receive payments, it can try collecting money from the co-signer before going after the primary borrower, according to the Federal Trade Commission.

To get to that stage, the borrower would likely have missed several payments, and the debt would already have started to affect your credit. Lenders are likely to consider legal action when the debt is between 90 and 180 days past due.

If the worst happens and you are sued for nonpayment, you’re responsible for all costs, including attorney’s fees.

5. Your relationship could be damaged

The borrower may start out making full, on-time payments toward the loan with good intentions. But financial and personal situations change. If the borrower falls behind on payments, your credit score can drop and lenders might go after you for payment. The negative impact on your finances can create friction between you and the borrower.

6. Removing yourself as a co-signer isn’t easy

If issues arise, you may not be able to remove yourself as the co-signer.

Not all lenders allow a co-signer to be released from a loan. Those that do may require a credit check of the main borrower to ensure they are individually viable to make the payments on their own. Personal loans typically require a certain number of on-time payments before the lender will reassess the primary borrower to see if they can make payments on their own.

How do I Protect Myself as a Co-signer?

Signing on as a co-signer can enable a friend or family member to purchase a vehicle who might otherwise be unable to obtain financing. However, co-signing carries some risk because you share equal legal liability for the debt, and missing payments or default will have an impact on your finances. However, if the car owner is liable, co-signing may help your credit.

Consider these factors to safeguard your financial security if you decide to act as a co-signer on a future auto loan.

1. Serve as a co-signer only for close friends or relatives

One of loan co-signing’s biggest risks is potential damage to your credit score. Ideally, you should only assist a friend or family member whom you trust — someone with a consistent income who is financially stable. You need to be confident that the primary borrower will be able to pay but just didn’t qualify due to their lack of financial history or age.

2. Keep copies of all the loan documents

Just as you would with any loan for yourself, make and retain copies of any documents related to the loan you’re co-signing. Keep this paperwork until the loan is paid in full so you can reference the loan information whenever needed.

3. Create a contract

Although you will both sign off on the loan itself, having a separate contract stating your expectations of the primary borrower can be an added layer of protection. Such an agreement can also remind you of your arrangement’s seriousness. This contract doesn’t have to be too complicated. Try a promissory note outlining the costs, obligations and what default will mean for both parties. After you both have agreed, bring it to a notary to have it finalized.

4. Track monthly payments

One way to feel more confident in the primary borrower’s ability to pay is to keep track of the monthly payment schedule. This could be as simple as setting a calendar reminder to check on their spending.

While this might feel awkward, remember that your credit is on the line. Reach out and open up a conversation to check in on your friend or family member without micromanaging the loan.

If the primary borrower misses a payment, the creditor is not even obligated to notify you. If you don’t notice the missed payment yourself, your credit score could plummet fast. For this reason, you’ll want to track monthly payments. You may even ask the lender to copy you on monthly loan statements.

Keep an eye on your credit report for the loan’s duration, noting any late or missing payments that may impact your credit.

5. Ensure you can afford payments

When all else fails, you need to know that you can cover the payments on the loan. You may use an auto loan calculator before the purchase to see how much car you can afford. If you cannot pay back the lender, your credit score will be in trouble — and you may risk default and other legal action. The primary borrower has most of the responsibility, but you are ultimately on the hook for the loan as a co-signer.