DOES COSIGNING AFFECT CREDIT? HOW TO DECIDE WHETHER TO COSIGN A LOAN
There comes a time in almost everyone’s life when they need to borrow money. If that person doesn’t already have established credit or has no credit at all, the chances are that they won’t get approved for a loan.
This is where a cosigner comes in. Individuals will often ask friends or family members to cosign a loan for them when they need to purchase a car or pay for school, and they don’t have good enough credit to do so on their own.
But does cosigning affect credit? When you cosign a loan, it does show up on your credit report.
Plus, you are contractually obligated to make all payments that become delinquent.
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If someone you know asked you to cosign a loan for them, you should understand how it affects your credit before you sign.
Learn about how cosigning affects credit and other things in this article.
Why Would Someone Ask You to Cosign?
Sometimes a borrower can’t obtain a line of credit or a loan on their own. Usually, it’s due to a lack of credit history, which is typically the case for a young person or a first-time borrower.
In some cases, a new borrower will get approved for a loan but at a very high-interest rate. Having a cosigner with established credit can bring that interest rate down significantly.
Most people make financial decisions that they regret at one time or another. Being delinquent or acquiring too much debt can significantly lower your score. At that point, people with bad credit usually need a cosigner to get approved for a loan.
What Does It Mean When You Cosign?
When you cosign a loan, you’re just as much a part that loan as the borrower. You complete a loan application together, and you agree to pay off the loan with the borrower.
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Even if the borrower is set up to make all the payments, if they fall behind at all, those payments become your responsibility. Once you sign the application, you’ve taken on the responsibility of their debt.
With things like established credit, good credit history, reasonable income, and a low debt-to-credit ratio, a cosigner helps a borrower get approved for a loan. If a borrower gets approved, but with a very high-interest rate, a cosigner can help to bring that interest rate down.
In other circumstances, problems in the past continue to haunt the present if a borrower has had significant delinquencies.
A good cosigner will strengthen the loan application for the borrower because the lender’s risk is lower, knowing that someone responsible and with good credit is there as a backup.
It Goes on Your Credit Report
When you cosign a loan, the debt appears on both your credit report and the borrower’s credit report.
On a positive note, the loan could potentially help both parties build positive credit, as long as all payments are made on time.
But if the primary borrower misses payment deadlines, each one of those delinquencies will affect your credit as well.
It’s also important to remember that the borrowed amount will show up as an open line of credit on your credit report, so if you’re planning on taking out any loans of your own in the near future, lenders might deem you as a greater risk.
The last thing you’d want is to get a collections call or a past due notice in the mail after the primary borrower misses payments. So, in addition to cosigning, it’s also essential that you communicate with the primary borrower, to make sure they’re making payments on time.
A late or missed payment could remain on your credit report for several years. The lender will treat you as if you borrowed the money yourself, which you did!
If the primary borrower can’t keep up, you’ll be left with the bill with nothing to show for it.
If you decide to help that loved on by cosigning their loan, keep reading for tips and things to consider.
Know Your Borrower
Even though there are risks, if you know your borrower and trust their judgment and responsibility, it could benefit your credit and give you and your borrower peace of mind, knowing they’re getting the loan they need.
Cosigning for a friend or family member, especially one who has had delinquencies in the past, is risky. If you decide to cosign, make sure you communicate well and foresee that they will, in fact, be able to pay their debt on time.
If a coworker or a casual acquaintance asks you to cosign, it’s probably in your best interest to say no, especially if you aren’t familiar with their credit history and character.
Keep Documentation of Everything
Make sure you get and keep copies of ALL the loan documents. Plus, ask for duplicate statements to be sent to you so that you can monitor and track the primary borrower’s payment plan.
That way, you won’t have to check-in or harass them to make sure bills are paid on time. You’ll be able to see for yourself the status of all debt payments.
Look over Your Budget First
Can your pockets handle the strain of making bad credit loan payments until it’s fully paid if the primary borrower defaults on your loan?
Be prepared, because it does happen, no matter how well you think you know someone. Make sure the loan won’t impact your savings, your future, or anything else having to do with your own credit or borrowing needs.
Ask the primary borrower to review their own budget and to show you how they’ll be able to make routine payments. While you might be hesitant to be so pushy, don’t. If you’re about to commit to a debt responsibility, you have every right to ask for proof that they’ll be able to pay.
Ask About a Cosigner Release
Some loans include the option for a cosigner release. Ask the lender if they do and find out what the requirements are.
The primary borrower might have to make a certain number of payments on time. Find out what the requirements are before you sign and make a plan to release yourself as soon as those are met.
Many lenders don’t offer the option, so it’s in your best interest to shop around and find one that does.
Tips for Cosigning
It can be a great thing for a primary borrower to have someone on their side to help them get the loan they need and build credit in the process.
If you do say yes, make sure this borrower is worth it and that you’re confident in their ability to pay. And once you decide, take pride in the fact that you have the ability and desire to help someone you care about.
Stay in close contact and make sure you communicate and formulate a plan to pay together.
Make sure that you have access to all the loan information, including payment statements and history.
If your borrower has to miss a payment, make that payment rather than letting it run late. If you do, it’ll impact both your credit scores.
Talk to them about you getting released as soon as they meet those requirements so they know that while you’re happy to help them out, you’d like to get out as soon as it’s possible.
Alternatives to Cosigning
If you’re hesitant to cosign for the person who asked, explore some other options first.
Maybe you could lend them money for a down payment, for example. Even though you’ll be forking out some funds, there’s less risk than putting that bigger loan on your own credit report.
A down payment could qualify the borrower for a loan with lower monthly payments or lower interest.
You could also lend the borrower the money yourself. If you do, make sure you build a contract that you both sign and agree to, to ensure you’ll be paid back.
Nowadays, there are plenty of options for acquiring a loan with bad credit. So if you’re hesitant to cosign, you could always get your primary borrower to look at those bad credit options.
Does Cosigning Affect Credit?
Does cosigning affect credit? The answer is yes. If the primary borrower for whom you cosign makes all of their payments on time, your credit will benefit.
But if the primary borrower misses any payments or becomes delinquent, your credit will inevitably take a turn for the worse. That’s why it’s best to only cosign for someone you know well, who has a plan.
If you do decide to cosign for someone close to you, make sure you both ensure it’s within your budget to make payments and keep all documentation pertaining to the loan.
If your friend or family member is new to borrowing money, help them do the research. Take a look at different personal loan options and loans with no credit check to help them decide what’s best for you both.
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