Effects on Credit of Co-signing for a Loan

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What are the risks of co-signing on a loan? Will it affect my credit rating and my ability to get other loans for myself?

Can I be hurt by co-signing? What are the risks? Will it hurt or limit my credit?

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  • Learn how co-signing affects your credit.
  • Know the risks when you co-sign a loan.
  • Protect yourself as best you can, when you co-sign a loan.

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 .

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  • PJ
    Franklin, IN,
    Jan, 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?
    • BA
      Jan, 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.
    • BA
      Jan, 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.
  • L
    Aurora, IL,
    Nov, 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.
    • BA
      Nov, 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.
  • MG
    Warwick Town, NY,
    Sep, 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.
    • BA
      Sep, 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.
  • RF
    Clarksville, TN,
    Jun, 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?
    • BA
      Jul, 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).
  • AF
    Park City, IL,
    Jun, 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.
    • BA
      Jun, 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.