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Co-Signing a Loan Risks & Credit Score Impact

I co-signed a loan, and now the primary borrower wants to refinance. Do I need to co-sign again? How will co-signing affect my credit score?

Three years ago I co-signed a loan because my credit was better and the payments would be lower for the primary borrower. The primary borrower has been current on payments, and now wants to refinance and cut the monthly payments. Must I remain as co-signer if the loan is in good standing? Will co-signing affect my good credit rating?

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Bill's Answer
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Merge Ahead: Consolidate Into One Payment
Highlights

  • Co-sign a loan understanding the risk you shoulder.
  • Co-signing a loan can damage your credit if the primary borrower defaults.
  • Refinancing a loan can remove a co-signer's liability.

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

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12 Comments

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  • VS
    Nov, 2013
    vijju
    Boston, MA
    I co-signed for one of my family member's student loans. She defaulted on the payments and it's now with a collection agency. I want to get on a payment plan and improve my credit scores. But I'm not sure how to start this process. Should I call the collection agency? Should the borrower call them? Is it better to use a professional debt management agency to call the collection agency to negotiate collection charges and other fees? Can you please help me? Who is in a better position to negotiate with the collection agency? Also will they negotiate on any charges besides principal and interest on the loan? Please help. Thanks in advance.
    0 Votes

    • BA
      Nov, 2013
      Bill
      Either co-signer can negotiate a settlement with a collection agent. Is it better for the student or the parent to negotiate? We don't know if collection agents treat either differently. It comes down to who is a better negotiator.

      Regarding hiring a professional, the same answer applies. If you like to negotiate and do it well, then consider doing it yourself. The two things the pros have is a database of past settlements to use as a guide, and the chance of an existing relationship with the negotiator on the other side of the phone.

      If the collection agent is working on a contract basis for the original creditor, the collector must follow the guidelines the debt's owner creates. However, if the collection agent bought the account, it is in the driver's seat. In this situation, everything is subject to negotiation.

      We know a great deal about settlements for credit card debt. By contrast, we are still learning the rules of the road for student loan debt.
      0 Votes

  • JK
    Aug, 2012
    Janet
    Puyallup, WA
    Are there any limitations on the number of loans a parents can sign? Also - does it have to the parent of the child to sign the loan or can it be another family member or friend? Thank you.
    0 Votes

    • BA
      Aug, 2012
      Bill
      Anyone can co-sign on a loan, providing the lender accepts that person as a co-signer. A co-signer can be a parent, sibling, spouse, roommate, friend, or neighbor.

      There is no law limiting the number of times a person can co-sign loans. Lenders will commonly analyze a co-signer's credit score, income history, and debt-to-income ratio (DTI). Some lenders will not accept a co-signer with a high DTI. Other creditors may ignore DTI and focus on credit history. For instance, Discover looks for a clean credit history, but does not look at DTI, when qualifying a co-signer for a private student loan. Essentially, the requirements will depend on the lender's policies and the type of loan.

      Remember, co-signing is a major decision. The co-signer is 100% responsible for the debt. If it is not paid on as agreed, the co-signer will be on the hook and may not even know the loan is delinquent. If you co-sign, make sure that you monitor the loan monthly.
      0 Votes

  • AV
    Apr, 2012
    Anu
    Warren, MA
    I co-signed for my sister’s student loans (2) with Citi for $36K in total. I live in MA. She hasn’t made single payment so far and she rec’d a default on one of the 2 loans. Citi is sent me a letter that the loan defaulted and I will need to make payments. What are my options at this point? Should I pay the minimum payments on her account so the other loan doesn’t get default? The interest rates arr 6.75% and 3.25%. Will debt consolidation by my sister effect my credit report? Or Can she negotiate pay to delete with Citi and if so can they come after me for unsettled amount? Or can she negotiate with Citi to pay to relieve me (do we have anything like that)?

    I haven’t checked my credit report yet but am sure this has ruined it? Please let me know how I can save myself. I don’t mind giving her some $$ and enter into settlement so it doesn’t impact my credit.
    0 Votes

    • BA
      Apr, 2012
      Bill
      When a primary borrower fails to make a payment, this almost always results in a negative mark on both signers' credit scores. You mentioned you have not looked at your credit report. You can get a no-cost, no-gimmick copy at AnnualCreditReport.com.

      If you value your credit score, I suggest making the minimum payments so the account does not become delinquent and cause harm to your credit score.

      With some student loans, it is possible for the borrower to remove a co-signer after a certain number of payments are made on time, and the loan is down to a certain percentage. Here, however, the loan is delinquent, so the borrower will not qualify — assuming the loan itself qualifies. Otherwise, the borrower must refinance the loan.

      See the Bills.com article Student Loan in Default page to learn more.
      0 Votes

    • AV
      Apr, 2012
      Anu
      Warren, MA
      Thanks for your quick response. I just checked my credit reports and I could get my TransUnion scores only. It was really low even without the defaults on Student loans that I co-signed. The missed payments on student loans don't even show up yet and my scores are really low. I used to be at 700+ before co-signing and i'm totally ruined. Do you think making monthly payments might not affect my score? Please help me so my scores don't sink further.
      0 Votes

    • BA
      Apr, 2012
      Bill
      Making the delinquent account current today will help your credit score recover. But it will be a slow road you travel. See the Bills.com resource Short Sale, Foreclosure & Your Credit Score to learn more about FICO score recovery times.
      0 Votes

    • AV
      Apr, 2012
      Anu
      Warren, MA
      Do you know how long will it take to recover if I'm 100 days behind on the payments? Say 1 yr or 2 yrs? Thanks, anu
      0 Votes

    • BA
      Apr, 2012
      Bill
      There is no easy answer to your question because credit scores are the result of the input from many variables. For example, if you have several distinct tradelines you are current on, your time to recovery will be much faster and to a higher score than if you have one tradeline. Follow the hyperlink in my earlier response to get a better idea of how complex the answer to your question is.
      0 Votes

  • TM
    Apr, 2011
    Tara
    Corona, CA
    We live in CA. My sister-in-law asked my huband to co-sign a loan for her. I refused saying I would never agree. She has credit in the low 500s for a reason. My husband went behind my back & did it anyway. I only found out when we went to refinance our own home. I am very angry he & his family deceived me. Am I responsible for this debt even though I did not agree to assume it?
    0 Votes

    • BA
      Apr, 2011
      Bill
      In a community property state, when one person assumes liability, the community assumes the liability, generally speaking. You mentioned California. Consult with a California lawyer who has family law experience to learn if you, under your particular circumstances, have liability.
      0 Votes

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