As a cosigner on a loan, you are guaranteeing the person you are cosigning for — also known as the borrower — will repay the loan as agreed. Your act of cosigning a loan can help the borrower get better terms because you are taking on certain responsibilities related to that loan.
If the borrower does not pay the loan on time and in full, you are responsible for repaying the debt. This means that the loan company can pursue collections and other actions against you, and your credit history could be affected.
What Are My Responsibilities as a Cosigner?
When you agree to act as a cosigner, you’ll have to fill out a loan application — just like the person you are cosigning for. Once the lender approves you as a cosigner, you are responsible for paying the loan if the borrower does not.
This means that should the primary borrower fail to pay the loan according to the agreed-upon terms. You can be subject to similar legal action as if you had also failed to pay the loan.
To avoid any unpleasant surprises, it’s important to follow-up with the primary borrower each month. Although the lender may contact you if the borrower defaults, it’s still your responsibility to ensure the payments are made as agreed.
Can Cosigning a Loan Hurt My Credit?
The act of cosigning a loan won’t hurt your credit in and of itself. All payment history is reported to the credit reporting agencies for both you and the person you cosigned for, however. If a payment is at least 30 days past due, it can be reported as late to the credit bureaus, which can impact your credit.
Besides impacting your credit, there are other risks involved with cosigning a loan. Here are a few to consider:
Late Fees
Depending on the type of loan, late fees may apply when a payment is not made on time, which the lender can add to any missed payments. If the person you cosigned for can’t or won’t bring the loan up to date, you’ll be responsible for doing so, including paying for any late fees incurred.
Legal Actions
If you aren’t able to make the required payments, expect lenders to try and collect what you owe via phone calls and letters. The lender may even file a lawsuit against you for payment. Collection attempts may be reported to the credit bureaus, which can harm your credit.
Restricted Ability to Borrow
Even though you may not plan on making payments on a loan you cosign, lenders will consider the loan as your debt. Because a portion of your monthly income is potentially committed to the loan, you may find it harder to qualify for loans you need, such as an auto loan or mortgage.
Difficulty in Opting-Out
Unfortunately, when you cosign, lenders expect you to remain on the loan. So if you cosign a car loan that lasts five years, you’re financially committed for five years. In some cases, it is possible to remove yourself from the loan, but don’t count on it.
Things to Consider When You’re Asked to Cosign a Loan
Now that you know the risks of cosigning, there are some other things you may want to consider before you decide to take on this role.
Not everyone has the financial status to qualify as a cosigner. Lenders look for cosigners who have stable employment, a verifiable income, above-average credit scores and stellar payment history.
Likewise, the type of loan might not be right for you or the primary borrower. Lenders offer secured and unsecured loans. Secured loans put the borrower more at risk because collateral, such as a house or car, is on the line if payments aren’t made as agreed. But lenders can choose to try to collect what is due from the cosigner even if collateral is involved.
On the other hand, unsecured loans do not require collateral. If lenders cannot collect from the borrower, then you can expect them to attempt to collect from you.
Reasons to Say Yes to Cosigning a Loan
Sometimes, saying yes to cosigning is the right move. Here are some situations to help you decide if it’s right for you.
You’re in a Financial Position to Help Out
You may decide to say yes to cosigning if your finances are stable, and you won’t have any problems making the payments on the borrower’s loan in the event of default. You may end up making the majority of the payments, however.
You Trust the Person Asking You to Cosign
Perhaps you know the person’s financial habits well, and you trust completely that he will make the payments on the loan. If this is the case, you may decide to cosign.
You Plan to Make the Payments Anyway
One last reason you may say yes to cosigning is if you plan to make the payments on the borrower’s behalf. For instance, your child may not be financially ready to make payments on his own, but you want to give him an advantage by helping him build his credit. So, you cosign the loan and assume full responsibility for the payments.
Reasons to Say No to Cosigning a Loan
You are in control of your financial decisions and should never feel obligated to cosign a loan. Here are some situations that should cause you to think twice before signing on the dotted line:
You Don’t Know the Person Very Well
It’s easy for someone to commit to making payments on a loan. But can you trust the person to follow through? If you don’t know the person or trust them completely, you may want to say no.
You Can’t Justify Serving as a Cosigner
If someone asks you to cosign on a loan for something they can’t afford or don’t need, such as an expensive fishing boat or a third car, you may not want to cosign.
You’re Not Confident You Can Make Payments if Needed
If you are not 100% confident that you can make the payments on the borrower’s loan if needed, you should say no to cosigning.
There’s always a chance that the borrower could default — even if he doesn’t intend to. Unfortunately, life situations, such as job loss, can and do occur. Then, you’ll be left with the responsibility of paying what’s due or risking damage to your credit.
You Are Planning to Get a Loan for Yourself in the Future
When you cosign, you’re committing a portion of your income toward the loan each month, which can reduce your ability to borrow. Lenders consider the loan as your financial responsibility. If you already have substantial debt and you’re planning to apply for a car or home loan in the near future, you may not want to cosign.
Agreeing to be a Cosigner is a Huge Responsibility
Cosigning a loan is an ongoing financial commitment. Even if you think you won’t have to ever make a payment, you can expect the lender to still hold you responsible if the borrower defaults. And if you can’t pay what’s due on the loan, your credit could suffer.
Keeping an eye on your credit is a good idea. By doing so, you’ll always know if you’re in a position to cosign or if a late payment is reported to the credit bureaus.
