How Does Cosigning a Loan Affect Your Credit?
Cosigning for a loan is an action that should never be taken lightly, as it can have very serious implications for your credit history. The reason you’re asked to cosign a loan is usually because the credit applicant did not meet the requirements to qualify for a loan on their own. Your signature on the loan implies that you are allowing the main credit applicant to “borrow” your good credit. It also means you agree to abide by the terms of the loan. If the borrower defaults, you are obligated to pay off the balance to resolve the total amount.
The cosigned loan will APPEAR ON YOUR CREDIT REPORT and can directly affect your credit as a debt owed. If you choose to apply for additional credit of your own, lenders may consider the debt from the cosigned loan when deciding whether or not to extend additional credit.
Ideally, the person you cosign for is reliable, never late and never misses a payment. Your willingness to risk your credit helps the borrower get the loan and can help them build a positive credit history.
If the person you cosign for defaults on the loan, you are responsible for paying back the debt. The unpaid debt will appear on your credit report, seriously DAMAGING YOUR CREDIT and perhaps your ability to qualify for new credit. If left unpaid, it could also lead to collection accounts and further damage your creditworthiness.
Who Cosigns for Loans?
Business associates, family members, spouses and friends all have the option to cosign for a loan. However, many financial experts are quick to advise that you use caution before you combine your credit with anyone else’s through a cosigned loan. Open communication with the co-borrower is essential. Make sure they fully understand their responsibilities and that there is a clear understanding of how the debt will be managed.
Friendships and relationships can be ruined if a co-borrower defaults on a loan. If there is a danger of default, contact your lender and ask if you can set up a different payment schedule or adjust the loan’s interest rate. Turning the other cheek can only make the situation worse. Your good credit is at stake.
You Are in Control
As a financially responsible individual—and one who strives to avoid life in the red—you have the ability, and responsibility, to weigh the risks of cosigning a loan. Before you sign on the dotted line, review your own credit and understand how taking on additional debt can impact your credit.
Hire a Lawyer
While cosigning a loan is largely a personal decision, a default by the co-borrower can leave you holding the bag. You may want to hire an attorney before cosigning to get the best advice and counseling regarding your options. A lawyer can help you draft a written contract to protect your interests beforehand.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.