Co-sign Loan

The co-signer takes responsibility for repaying the loan if the primary borrower does not. If the lender cannot collect from the borrower, the co-signer must repay the loan plus late fees, interest, or other charges the lender adds.

There are two main effects on a co-signer’s credit score. First, it appears on a co-signer’s credit report, much like any other debt. If payment is late, for instance, that derogatory notation will appear on the co-signer’s credit report, lowering the co-signer’s credit score. This can happen well before the co-signer has any idea that there is a problem, as the co-signer does not often receive a monthly billing statement.

Secondly, because the co-signed loan shows on the co-signer’s credit report, it may prevent the co-signer from obtaining credit because the loan balance is included in the co-signer’s debt-to-income ratio. If a co-signer is planning to buy a house, car, or other large purchase during the life of the co-signed loan, it is a good idea to think about the implications. Even if all payments are made on time on the co-signed loan, the altered DTI may disqualify the co-signer.

You did not ask this question, but readers frequently ask how to remove themselves as loan co-signers. There are two ways I am aware of to accomplish this: First, the primary borrower must refinance the loan without a co-signer. This means the primary borrower must have a sufficient employment history, a credit score that satisfies the lender, and a low debt-to-income ratio. The second way is for the co-signer to file for bankruptcy. This is a drastic step, and should be attempted after consulting an attorney with experience in bankruptcy.

Your Questions

The primary borrower plans to refinance the loan you co-signed. You ask if the primary borrower will qualify alone, or if you need to co-sign again. That is impossible for me to answer given what you shared in your message. Every lender wants three qualities from a potential customer: Steady income, a relatively clean recent credit history, and a low debt-to-income ratio. If the primary borrower has these three qualities then you will not need to co-sign the refinance. If the primary borrower’s income history, DTI, or credit history has not improved from when the original loan was taken, then you will need to co-sign again.

As implied from the discussion above, co-signing a loan in and of itself does not harm a co-signer’s credit score. However, as discussed above, if the primary borrower does not make the monthly payments routinely or at all, then the co-signed loan will cause a significant negative impact on your credit score.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com