Credit Score How Credit Works

The Truth About Co-Signing For a Loan

Written by Rebecca Lake

Getting approved for a loan can be an uphill climb for borrowers who don’t have the best credit rating. If a lender sees a low credit score, they may be reluctant to green light a loan without having a cosigner on board.

If a friend or family asks you to cosign for a personal loan, car loan or student loan, you may not think it’s that big of a deal but you’re wrong. Co-signing can have some serious financial implications that you should be aware of before you sign your X on the dotted line. If you’re entertaining the idea of becoming a cosigner, here are some import ant realities that you need to understand first.

Reality #1: Cosigning makes you responsible for the debt

One misconception that people tend to have about cosigning is that if they’re not the one using the loan funds, then they’re not the one who’s on the hook for repaying the money. The truth is, when you cosign on a loan or any type of credit for that matter, you’re agreeing to share the responsibility of paying back the associated debt. Essentially, cosigning in the eyes of the lender is the same as taking out the loan yourself.

So what does that mean from a legal perspective? If your cosigner agrees to make the payments but they end up defaulting on the loan, (meaning they don’t pay) the lender can initiate collection actions against both of you to recover what’s owed. Even though you may have had nothing to do with the loan since signing the paperwork, you could become the target of phone calls or letters asking you to pay up.

If your cosigner doesn’t make an attempt to honor their obligation to the lender, the lender can up the ante with a civil lawsuit. The lender can sue both you and the person who asked you to cosign for the outstanding loan balance, plus any late fees or interest charges that have accrued since they defaulted. They can also ask the court to make you pay their attorney’s fees. If the lender successfully proves their case, they can move on to the next step: garnishing your wages or your bank account.

At the end of the day, you could end up on the losing end of a court judgment just for putting your signature on a loan for someone else. While you may have thought you were helping the other person out, you were really just creating financial trouble for yourself.

Reality #2: Cosigning can affect your credit

Cosigning on a loan can impact your credit in a few different ways. First, the lender will have to pull your credit report as part of the loan application process. Hard credit pulls show up on your credit report. Inquiries for new credit count towards your credit score calculation and each inquiry can trim a few points off your score.

If the loan is approved, the account will show up on both your credit reports. That means the payment history and the balance will also be factored into your score. As long as the person you cosigned for is paying the loan on time, then there may not be any negative consequence to your score. If they skip out on paying, however, then you could quickly end up in poor credit territory.

There are several different credit scoring models but one thing they have in common is the fact that payment history carries a lot of weight in score calculations. When you have multiple late payments on your credit because the person you helped to get the loan defaulted, that can wreak havoc on your score. Having an account go to collections or worse–end up as part of a court judgment–can be even more devastating. Negative items can stay on your credit report for seven years, meaning you have to deal with the after effects of cosigning over the long term.

Even if you step in and begin making payments on a loan that the primary borrower defaulted on, you can’t erase any late payments that are already on your credit report. Besides that, having an extra loan on your credit history can also affect your chances of getting approved for new credit down the line. If you’re planning to buy a home, for example, the lender will include the cosigned loan in your debt-to-income ratio (DTI) calculations. If the loan pushes your DTI too high, you could have trouble getting approved for a mortgage.

Reality #3: Cosigning can ruin more than just your credit

There are few things that can sour a relationship faster than an argument over money and cosigning can be a fast track to financial disagreements. If the borrower isn’t holding up their end of the bargain by making the loan payments and making them on time, you may start to resent having cosigned in the first place and before you know it, you’ve wrecked your credit and your relationship.

Adding someone to one of your credit cards as an authorized user is one alternative to consider if they’re simply trying to build credit. Again, though, you have to remember that you’re the one who’s on the hook for any purchases they make. In that scenario, you might suggest that they look into a secured credit card instead. A secured credit card requires a cash deposit up front but you don’t need a cosigner to get approved for one of these cards. That way, there’s no pressure on you to let someone else borrow money based on your good credit.

A good way to think about cosigning is to ask yourself whether you’d be willing and able to make the loan payments if the other person either can’t or won’t. If you’re comfortable shouldering that responsibility, creating some type of accountability or at least making sure that you have full access to the loan account can give you a measure of protection. Just be aware that it doesn’t completely eliminate any risk you may be taking on by cosigning.

About the author

Rebecca Lake

Rebecca Lake is a personal finance writer and blogger specializing in topics related to mortgages, retirement and business credit. Her work has appeared in a variety of outlets around the web, including Smart Asset and Money Crashers. You can find her on Twitter at @seemomwrite or her website, RebeccaLake.net.

22 Comments

  • I’m in such a turmoil right now because of my own spending behavior. Credit cards, and late payments. I was going to ask my mom to co-sign for a $5K loan to get everything caught up, but I hate rejection. So I’m going to have to figure out a way to catch up everything, step by step. With God’s help, I’m going to make it right. I may lose a credit card or two, but I must make it right and build my score back up.

  • Co-signing is like giving your life to another being to protect. If they pay on time and in full you are ok, but, if they do the thing most of them do … you are screwed.

    Having access to your social security number from the contract you signed … they can even open other credit. NEVER co-sign … for anybody. If you can lend them the money to make the purchase … have them sign a note with reasonable interest so you can take a loss on your tax return if they won’t pay.

  • I co-signed a car loan for my brother. A mistake. It went well at first when the bills were coming to me. But then he changed the billing address and then it all went off the rails. He defaulted and I ended up paying off the balance. It took years before I got everything straightened out. Never again.

  • Yes my credit was ruined by my Son and Daughter-in-law. They took out two loans in my name, social security and home address. My Daughter-in-law was a division manger at the financial company where the loans were taken out and talked my Son into signing the two contracts not my name. I lost my home of 41 years to foreclosure. Lie after lie my Daughter-in-law told over the years thinking things were going to work out. Boy I found out real hard that that $188,000 ruined my life. I had always paid my bills on time or ahead of time. Now I can not get anyone is see my side of the story. I have been ruined, no credit what so ever or can not get any.

  • So, not everyone needing a co-signer is in that condition because of their own behavior! Me, as a prime example! I spent my entire adult life struggling to make ends meet at jobs paying just above minimum wage. I worked hard while supporting my family. Then just before reaching retirement age, my wife first, be came critically ill, then passed away. About four years later, I suffered a severe stroke. Suddenly there is NO income, and a mountain of medical bills going unpaid. Needless to say, my credit score went into the toilet!

    Now I need a car. Not a fancy car! Just transportation. A 14 year old car, with nearly 200K miles on it! Well, relying on my credit score alone–even after working all my life–living in the same community for 40+years, if it took only a quarter to travel around the world, I’m not able to borrow enough to get me out of sight!!!!!!!!!!! Just saying!!!! Sometimes we need help even though it’s not all our own fault!!!

    • Well said vwry vwry well
      Said !!! Many many people havw has mo chice but to fall victim to societys
      Demand and superficial looks wears feels but most of all OWN THOUGHTS &FEElings !!! To many peoplewho not only coose but are acfraid of some sort of reprocution from whomever to whatever and im here to say my name Is McGerra Lee Beck / Taggart I am drom Cordova , Valdez , Kodial Island , amd Kenai peninsula , wich is where i do my damdest for qhT handed evwryday to run the and three kids ( AlL FRIGGEN GIRLS ) wich I literally thought my
      Husbad would
      Leave me if she waant. Boy !!! Ok im
      Parking lot crying go home to have my veey own husband say something to me and at the time i waa fummed i mean ready u know !!… mean mad and all of the above ! Left literally across the street mind you!! and talked to my best friend ( who has somw years on me ok!! Like her dughter who has a couple or a year in me !!! Oookkkaaayy ) i was on my knees at he coffee table telling her what he had said to me and the story but when i got to saykmg what he said out louns amd inheard my self say it !!!! In that vwry moment amd srood up couldnt say anything but i learned in that monet what he exacmeat by what he said and that was thw laat day of of keeping my mouth shut and taking it !!!! Anymoee fpr what i k ow what i am capabale of and u ur family fake ass friends will see as i laugh and yet the heart i am the love with old school and just giving out what i truly
      Just hope to receive back from them
      Other whatever !!!! People keep gelling me it will pay off someday to be a good friend partner sister brother wichever may be here or there my advice to all who will listen and not just try. Ut actually do u will see a difference alwaya alwaythink and do ur damdeat to feel ir even if u r not exactly whwre u wanna be go to where u want to be be with people who want to be thwm of course this positive when totally necessary even in bad situations just know there is nothing that can kill you hurt you anything that cN do that to you u can do the to them think be observant listen know your suroidonds and. Nwvwr trust anyone with anything u can know someone 30 years and never truly know who they r that just who they r with you and closed locked doors bring out if i belwvwd fully that is …………,;: no choice !

  • Thanks for this free advice. Excellent site. It’s hard to believe there are no hidden charges or resource materials to purchase to get this valuable information. I pray that you will continue to be bless in this endeavor to help others.
    Sincerely ,
    Harry

  • I no whot I mean now ,I co -signed for two people to get a car one kept thear end up but the other defalted on the loan an left me hanging ,they new I spent a lot time an money to straightening up my credit they wear making good money at the time an thear roomate was working to .insted of calling the bank an see whot could be done they take the car to an car dealer leave there in the lot an bye a older car an don’t bother to call the bank that they defalted on to tell them wear it is insted I had to call them an tell them wear it is an now I get the phone calls an threatening letters .I told them that it mess up thears as well as mine but they dont care .both her an her roomate r out of a job because of her big mouth an my credit that I worked so hard to fix is gone .I know they have money in the bank still.can I fight this in any way .please tell me . T U

  • I was never able to get my credit reports from any of the 3
    companies as you said in your first e-mail for $1 each
    altho I tried several
    several times. They are want at least $19.95 and it;s a hazzle
    What am I doing wrong.

  • I had a close friend that was going to co-sign for me but instead he helped me pay off everything i had in collections on my credit report so I could try to get a higher credit score and get a loan on my own and I am glad he didn’t now after reading this lol !

  • Thank you for all you advice. I have learned so much by reading your articles. I’ve also improved my credit by utilizing the tools you have provided! The best part about all of this is your advice is completely free and I can’t thank you enough for that. I sincerely appreciate you taking time out of your life to help people like me who was in desperate need of credit repair. I went from low 500 scores to high 600 or low 700 which is absolutely great in my opinion. I will continue to read/utilize your articles as well as informing anyone I possibly can about all your knowledge and help with repairing ones credit.

  • Your articles are very interesting. They teach me many solutions and or resources to improve my credit. I truly appreciate this site. Thank you.

  • Amen to your report on the worst credit mistake to make. Been there, did that! Hurt my credit for years. Finally got out by selling the house (and losing 25K).

Leave a Comment