7 Loans You Should Never Cosign

Business loans

Everyone knows it's tough to get a bank loan these days. And that's especially true for current and would-be small-business owners seeking capital. So if your son, daughter or another relative comes asking you to cosign a loan to help launch, continue or grow a business, you might be inclined to help. But business loans often require a personal guarantee and some lenders even require real estate as collateral. Thus, cosigning a business loan may not just put you on the hook for repayment, it could also mean you're putting your home at risk if that business loan goes sour.

Blend Images/Getty Images

Car loans

In 2012, six out of 10 car buyers who purchased new vehicles took out loans to do so, according to research firm J.D. Power. New-vehicle loans are getting longer than ever, with terms of five years or more for a record 32 percent of retail sales. J.D. Power says the average monthly car loan payment for a new car in 2012 was $462, and the average price of a new automobile has risen to $32,384. What all these statistics show is that a car is one of the most expensive items that many Americans will ever finance. Don't take the risk of having to pay for someone else's.

Peter Chigmaroff/Wave/Corbis

Construction loans

A construction loan is taken out to finance the building of some kind of structure. It could be a home, vacation property, business or office, even an entire shopping center. Construction loans have a variety of risks, including cost overruns, project delays, contractor issues and difficulties securing required permits. So these projects are notorious for having unforeseen expenses and unanticipated problems. Cosigning construction loans risks putting your credit and finances on the line for a project that could spiral out of control — or at least wind up being far more complicated or different than what you and the coborrower initially planned.

Matthieu Spohn/PhotoAlto/Corbis

Balloon loans

By definition, balloon loans don't fully amortize over time. When a borrower makes monthly payments, he or she is mainly paying interest on the loan. The entire remaining principal balance is due in full at the end of the loan term. But other things may also trigger the "pay right now" provision, such as a missed payment, a change in the borrower's financial standing or even a change in interest rates. The coborrower would have to pay — or you, if you cosigned the loan. Balloon loans are typically used in commercial real estate transactions, as opposed to residential housing deals. While most people get into balloon loans thinking they'll sell or refinance before the end date, that's not always possible. People with balloon loans, as well as cosigners, need to be aware of refinancing risk and the possibility that a balloon loan could reset at a much higher interest rate.

Flickr RF/Getty Images

Payday loans

Payday loans are another obligation you should never cosign. For starters, you would technically be the only person on the hook to repay this debt — not the person you're trying to help. That's because payday lenders make loans to one individual at a time. So as long as you have a bank account and a paycheck (or a Social Security check or other regular benefits), it's relatively easy to get a payday loan. Payday loans can carry annualized interest rates of 400 percent or more. If your family member or friend doesn't repay on time, a payday lender can instantly tap into your checking account, snatching away funds you likely need to pay other bills.