Effects on Credit of Co-signing for a Loan

How will co-signing on a loan affect my credit rating and my ability to get other loans for myself?

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Bill's Answer: Answered by Daniel Cohen

You ask excellent questions about the risks of co-signing on a loan.

The Co-Signer and Financial Responsibility

Although you may want to help a family member or friend who cannot qualify for the loan without a co-signer, it is important for you to understand what your obligations are when you co-sign on a loan. When you co-sign a loan, you take responsibility for repaying the loan if the primary borrower does not. This means you may repay the loan plus any late fees, interest, or other charges the lender has added if the lender cannot collect from the borrower.

FTC Rules About Co-Signing

According to the Federal Trade Commission (FTC), a co-signer must be presented with a detailed disclosure by the lender before he or she co-signs for the loan that explains the co-signer’s obligations.

The disclosure reads, "You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

"You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

"The creditor can collect this debt from you without first trying to collect from the borrower. (Depending on your state, this may not apply. If state law forbids a creditor from collecting from a cosigner without first trying to collect from the primary debtor, this sentence may be crossed out or omitted altogether.) The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

"This notice is not the contract that makes you liable for the debt."

As the disclosure explains, the co-signer is exposed to a lot of potential financial harm. Remember, even if the person you co-sign for has every desire and intention to repay the debt, if circumstances arise that make his/her repaying impossible, the co-signer is on the hook. Loss of income or job, an illness, or some other unforeseen event could impede the person’s ability to pay, leaving the co-signer the only with means to pay it back and fully liable to do so.

According to the FTC, "Studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan." The only reason the borrower is being asked for a co-signer is that the lender decided that the risk was too great to offer the loan without one. Sometimes, this is not due to the borrower having a poor credit history of bad payments, but due to the fact that the borrower has never had credit before. Having a loan co-signed for, if the loan is paid back as agreed, is a great way for a person without credit to establish credit worthiness, though that does not lessen the co-signer's responsibility in any way.

The Effect on Credit for the Co-Signer

Another impact you asked about was effect on the co-signer’s credit. There are two main effects. First, it will appear on your credit report, much like any other debt. If payment is late, for instance, that derogatory notation will appear on the your credit report, lowering your 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. 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. For instance, it is prudent to consider whether the co-signed loan would negatively affect the co-signer’s debt to income ratio and be a reason for not qualifying for the desired loan, even if all payments are made on time on the co-signed loan.

If You Decide to Co-Sign

Despite the risks involved, a person may decide to co-sign a loan, to help out a friend or family member. If the decision is made to co-sign, here are some things to keep in mind.

  1. Be certain that you can afford to make the payment on the loan, while maintaining your other financial obligations. If you cannot, you increase the risks that you could end up suffering collection efforts, including a wage garnishment, along with your credit rating suffering.
  2. If you are asked to pledge anything as security, such as a home or car, be aware that you could lose the asset, if the borrower defaults and you are not able to pay back the loan.
  3. You can make certain requests from the lender, which can offer you a degree of protection, though the lender does not have to grant them. For instance, you can ask the lender to make it so that you are responsible only for the principal of the loan, so you are not liable for late charges and collection fees. You can also ask that the lender notify you if a payment is late, so you can try to fix the problem before it gets out of hand and hurts you. In either of these cases, get the assurance from the lender in writing, or it is not going to help you.
  4. Keep all the records and paperwork associated with the loan. This way, if there is any dispute, you have records. Because the lender is not required to give these records to you, make sure to get copies from the borrower.
  5. Because rules can vary from state to state, check with the consumer rights department in your state of residence.

The FTC details facts for consumers about co-signing.

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

Best,

Bill

Bills.com

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Comments (67)


Penny J.
Franklin, IN  |  January 06, 2014
I just co signed for my daughter. They told me it would help my credit. She is leasing it for 3 years because she has no credit and is a college student and her bf couldn't even get it but yet they have their own place. My daughter has been at her job for 3 years. Before her bf got a new job he was at the job for 2 years but is now making more money. I'm really confused about how they have no credit when they both have there own checking account and good job history and their own place. Now how is this going to affect my credit if I need to get an apartment? How can they get away with lying to people if it don't help your credit and brings it down?
Bills.com
January 06, 2014
The FICO and VantageScore credit scoring models do not consider a person's age, sex, income, and length of employment when calculating a credit score. They may consider a person's rental payment history if the landlord reports that information to the consumer credit reporting agencies, which include Equifax, Experian, and TransUnion. Most landlords do not report this information. You mentioned checking accounts. If the checking account is in good standing, this information is not shared with Equifax, Experian, and TransUnion.

Co-signing for a loan becomes negative when the borrowers become delinquent on their payments. Otherwise, a current loan is a positive account and boosts a consumer's credit score.

We tend to focus on the negative side of loan co-signing on this page because of what can go wrong. When everything goes right, co-signing is good for the consumer because he or she qualifies for a loan they would have otherwise been denied, and the lender profits from the sale.
Bills.com
January 06, 2014
If the lease payments are made on time, it will help your credit score. However, when you co-signed you took on full financial liability for the payment. If you seek other credit or even when you apply for an apartment, the cost of paying for the lease could be figured into your ability to make the apartment rent. I suggest that you document that your daughter and her boyfriend make the payment, keeping proof of that ready to show anyone who may be concerned about that payment's effects on your debt-to-income ratio.

I don't know if anyone lied to you. A lender could very well be acting properly to request a co-signer, based on your daughter's thin credit history and other information from your daughter's and her boyfriend's credit report.
Lamont .
Aurora, IL  |  November 17, 2013
I co-signed a car loan for my girl friend maybe a week or so ago. The dealer said by me having no credit this will help me get a loan in February of 2013. Is this true? If how long will I have wait before the start to make my credit report look good? Please help me a.s.a.p because we still can take the car back to get a full refund.
Bills.com
November 18, 2013
Something doesn't quite add up. A co-signer is someone with stronger credit than the other borrower. The presence of the co-signer allows the less qualified borrower to get the loan, using the strength of the co-signer's credit. While it is true that you could benefit from being listed on loan, to help build your credit, it isn't clear to me why the lender would want you on the loan, when you have no credit history.

Separately, are you aware that you will be fully financially responsible for the debt, if you are listed on the loan? If you are not on the title, you will have no claim to the ownership rights but be on the hook if your girlfriend doesn't make the payments as agreed.
Mel G.
Warwick Town, NY  |  September 26, 2013
I live in New York. I cosigned on a car for my boyfriend. He made all payments on time, but was recently arrested. I'm afraid he will not be able to afford the car payment because of lawyer and court fees, etc. I'm extremely worried if he goes to jail that liability for the loan will fall on me. Can I return the car and say we can't afford it? It is financed through a bank.
Bills.com
September 26, 2013
I don't have good news for you. No contracts I've seen remove one co-signer's liability if the other co-signer is incarcerated. If one co-signer does not make the payment, the other is obligated to do so.

You can return the car to the lender. This is called voluntary repossession, and it comes at a cost. Be sure you understand your liability for the deficiency balance.
Robert F.
Clarksville, TN  |  June 29, 2013
I am trying to rent a house as I am required by my job to move. I currently own two houses. One is under closing, but as of now hasn't officially come off my credit report. The second is under contract to be rented later this month. SO I pay nothing out of pocket for these two properties at this point. But I do have a couple small loans and a couple credit cards which I pay on. With all this on my credit report, I'm worried I already wont be approved for a new home rental application. To make matters worse, my sister in law wants me to co sign an apartment for her. If I do, would that co-sign make it even harder to clear the credit app for a home rental, or would it not make any difference at all?
Bills.com
July 01, 2013
Co-signing could complicate things further. As you explained, you already have issues showing your actual debt-to-income ratio, as debts you are not responsible for may be counted by someone who views your credit report. It may be wise to move first, so your living needs are taken care of, before you co-sign for your sister-in-law (and make sure you fully weigh the risks of co-signing, as you will be financially liable to pay her rent if she can't).
Avi F.
Park City, IL  |  June 03, 2013
Hello, I am planning to attend Law School this fall. I've exhausted all ways of covering the cost for this first year and am left with having someone co-sign a personal/private loan for me. This person has agreed to co-sign for me. However, he has told me he plans to buy a home around 6-7 months from now. He will not co-sign if it means not being able/eligible to purchase a home. Is there any way to make sure that doesn't happen? Any input would be helpful. Thanks.
Bills.com
June 03, 2013
A key component to qualifying for a mortgage loan is the borrower's debt-to-income ratio (DTI). It is likely that a mortgage lender calculating the co-signer's DTI will include the required monthly payment on the student loan.

I recommend that your friend speak directly with a mortgage loan officer. The loan officer will calculate his DTI and say whether the student loan is a barrier to meeting the lender's DTI requirements or not.
Sameer K.
San Diego, CA  |  May 02, 2013
I have a recent car loan with a co-signer. I made three payments on time. But, now my co-signer doesn't want this debt to appear on his credit report. How can I remove this from his report? Can I qualify for a re-finance without co-signer after just three payments? I don't mind if the interest rate is a bit high.
Bills.com
May 03, 2013
Before I answer your questions, allow me to discuss three background issues:
  • Lenders are not required to report payment information about their borrowers to the consumer credit reporting agencies. However, if they do, the reports must be accurate. Some auto finance companies report information to the consumer credit reporting agencies, and others — such as buy-here-pay-here dealers and title lenders — tend not to. If your lender reports information about your loan to the consumer credit reporting agencies, then this loan's payment status will appear in both your credit report and that of your co-signer's.
  • This loan has two impacts on your co-signer's credit report. First, if you become delinquent on your payments, this will drag your co-signer's credit score down. Second, if your co-signer applies for a loan, this loan will be included in his or her debt-to-income (DTI) ratio.
  • The biggest reason for your co-signer to want you to refinance the loan in your name alone is to remove his or her liability for the loan. Should you default, the lender may collect up to 100% of the balance due from either person who signed the loan.

On to your questions:

  1. Accurate information cannot be removed from a credit report. Here, the co-signer has liability for this loan, which has a potential impact on the co-signer's ability to qualify for a future loan. I do not see a way for your co-signer to dispute this information and have the loan be removed from his or her credit report.
  2. You are on the right track in asking about refinancing this loan. I will assume you did not qualify for a loan by yourself three months ago, otherwise it is likely you would have avoided involving a co-signer. The question you should be asking is, "Has my creditworthiness improved enough in three months for me to qualify for a loan on my own?" Without seeing your credit score, looking at your DTI, and understanding your income history, I cannot answer your question. Talk to a loan officer at your bank or credit union to understand what you need to do to qualify for a vehicle refinance.

If your issue was a thin credit file, in other words you do not have a long credit history, then three months on one loan will probably not be enough for you to qualify for a refinance. However, each auto lender has its own qualifications for refinances, and you need to talk to several lenders to learn if you qualify.

Mike C.
Los Angeles, CA  |  February 13, 2013
I co-signed for a loan for my nephew back in 2001. As far as I knew, all payments were made and the loan was paid off in 2005. Now, a collection agent is calling me about an upaid balance. What do I do?
Bills.com
February 14, 2013
Take these two steps:
  1. The next time the collection agent calls, gather all of the contact information you have about his or her employer, including name, mailing address, and telephone number. Then send the collection agent a debt validation notice. Follow the hyperlink I just mentioned to learn how.
  2. Call your nephew and ask if he is current on the debt.

If your co-signer is current on his payments, then you are dealing with a fake debt collector.

Joie V.
Stockton, CA  |  January 28, 2013
I bought a car last 2011, and because i didn't have a credit history yet (at that time) my uncle agreed to co-sign me. But lately, he's been having problems financially, and i know that he's been having troubles with late payments and such. I have been very good with my payments and all, my question is, will he (my co-signer) affect my credit score in anyways? If he is, what should be my next step? Should i take him out of the contract? I'm really worried because i've been trying to build my credit worthiness..
Bills.com
January 28, 2013
Joie, your uncle's financial struggles will not harm your credit score. As long as your car payments are paid on time, your score will benefit from your auto loan being listed (and your uncle's score will benefit from that account in good standing, too). Until you can qualify for a better interest rate on your own than you got with him as a co-signer, there is no reason for you to try to refinance the car loan and have him removed.

As your goal is to build a strong credit score, I recommend that you open some other credit accounts (credit cards, for instance), so that you have more active accounts reporting. Do not run up debt on your new cards, but make occasional purchases and pay them off in full.
Nazer S.
Columbia, SC  |  September 19, 2012
I have co-signed for a car loan for my friend who do not have credit history .after an year my friend moved to different city. After 2 years of regular payment without missing even single payment , the car went into accident and it only has a labiality coverage. I came to know about the accident when the towing company contacted me to sign and fax a voluntary surrender form to sell the car in auction . After signing the form, a month latter my credit score has fallen down from 710 to 620 all of a sudden .My friend is ready to make a payment for the remaining balance but the financers took time to sell the car and give us the balance amount. Now my question is why is delinquency / derogatory activity is reported on my credit report. First of all why co-signer has got to do with the accident and more over I observed my friends address reflecting as my previous address on the report. There is never a missed payment nor he is making delay in paying off the balance . Please advise how I can fix this negative flag on my credit history . Any advice is highly appreciated.
Bills.com
September 19, 2012
As a co-signer, you are 100% responsible for the loan. Your credit problems began when you agreed to a voluntary surrender, which was reported to the credit bureaus. The faster the debt is brought down to a $0 balance, the sooner you can begin rebuilding your score.

You can try to speak directly with the creditor, to see if they can change how the account was reported to the credit bureaus.
Stephanie S.
North Sarasota, FL  |  July 26, 2012
I have a question relating to co-signing in FL. My friend co-signed for a charge card for me. Due to divorce, I could not make the payments. My friend moved out of state and obtained a mortgage and has since passed away. How can his mortgage show up on my credit report when I never had any part of the mortgage? I'm so confused and I'm trying to get my annual credit report and I have to mail proof because I couldnt answer the security questions about his mortgage. HELP!!!
Bills.com
July 26, 2012
Your friend's mortgage should not appear on your credit report whether he or she is alive or dead. The only way your friend's mortgage could appear on your credit report legitimately is if you were a co-signer on the mortgage.

Dispute the false information with each of the three credit reporting agencies that report it.
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