| by Christina |
Considering that on average 3 out 4 people that co-sign on a loan end up paying it themselves, one would think that consumers would be extremely cautious when making this type of decision. Oftentimes it is against our better judgment that we sign our names on another person’s loan, but yet it is natural to want to assist a family member or close friend by helping them secure a loan and hopefully repair or build their own credit scores. Depending on the person and the circumstances, choosing to be a co-signer on a debt is not always the wisest decision.
What Does It Mean to Co-Sign on a Loan?
Once in a while we hit a bumpy road in our financial paths and when trying to secure a loan or even a mortgage, those bumpy paths can mean the difference between a “yes” and a “no.”
In these cases, obtaining a co-signer with a positive credit history or credit score is the easiest way to get approved. If you are asked to co-sign on the loan, you are considered a co-debtor or co-owner of that loan. The loan will not only show up on your credit report, but so will the payments made on the loan, resulting in your being responsible for the loan just as though it were yours.
If payments are made on time and within the guidelines of the agreement, the co-signer has nothing to worry about. If however, the payments are not, (because remember that sometimes a person needs a co-signer for a valid reason), then that’s where you will likely run into problems.
How Co-Signing Affects Your Credit Score
Exactly how your credit will be affected depends largely on the person and the circumstances that apply to the person whose loan you are co-signing on. Remember that no matter who it is you want to help, you are tying your financial future to theirs when you choose to co-sign for a loan. It will show up on your credit report just as if you had borrowed the money yourself, and you will owe the full amount of the debt if they default. Before making the decision, ask yourself the follow questions:
- Can I afford to make this payment if they default? To save your own credit, you will need to make the payment on the co-signed loan as well as continue to pay for your own obligations.
- Is there any chance at all that they will default on this loan? Could they lose their job?
- How will the new loan affect my credit score? Not only can a default hurt your credit, but having too many loans or accounts on your credit can harm it as well. An additional loan, even though it isn’t yours, could appear as though you are overextended.
- Is there anything that I am going to want to borrow money for in the near future? How will this loan affect that? Much like the previous question, if it appears that you are already overextended in credit, it may hurt your chances in the future for loans that you may need yourself.
Remember also that co-signers can be sued in court, just like the person who took out the loan in the first place. In fact, if you co-sign for someone, and they are late on their payment, lenders have the right to call you to collect the money, garnish wages, and seize property. Unfortunately, once you co-sign, you cannot just ask to have your name removed from the account if things go badly.
The last thing to consider is that co-signing on a loan for your friend or family member may not actually help them in the long run. Although it will help them now by securing the loan for a house or credit card, statistically, when people have poor credit and the banks see a co-signer for a loan, they are more likely to ask that person to get a co-signer again. By helping them out now, you could actually be making it more difficult for them (and you) to obtain loans in the future.
Whatever you decide, do not feel badly. Just be informed. If you go into a co-signing situation, be aware and prepare yourself for the risks that are involved. It is possible that co-signing can result in a winning situation. If you are unprepared, you run the risk of losing your own good credit history and owing the money that the other person borrowed.
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October 16th, 2008 at 15:21
This is a good example of the negative aspects of co-signing with someone whose financial house may not be in order and who is expected to make payments.
An alternative would be to have Dan (the father) add James as a co-signer to his mortgage or car payment and to try to help James build his credit back up. This is much less risk for Dan (since he is responsible for making payments and his ability to make payments is under his control) and has a positive outcome for James (his credit rating increases however slowly).
I have been considering doing the same thing for my children, adding them as co-signers to my loan which I feel comfortable I can pay regularly to help build their credit.
December 11th, 2008 at 01:41
Thanks for this information, nice article. I need information to reffinance my home because I read at http://home-refinance-mortgage–loan.blogspot.com/ , the global crisis will make the rates increase, so it’s to hard to apply credit for my home now. can you help me??
January 22nd, 2009 at 17:44
How would I determine if someone used me to co-sign a loan without my knowing ?
March 13th, 2009 at 16:32
I co-signed for a mortgage with my daughter in 2006.. I regulary check my credit report and her mortgage never showed up on my credit report until 3 weeks ago.. when a 120 day lated NOD was filed.. needless to say my FICO dropped from low 700′s to high 500′s.. I called the loan servicer and asked why I had never been notified.. surprised they said they did not have my contact info..bull.. they have my loan app.
Do I have recourse against them?
April 2nd, 2009 at 17:41
I co signed for my wife on a loan does this effect my debt to income ratio?
April 14th, 2009 at 07:21
How about a car loan. I co-signed for my daughter. I’ve made several payments but can”t keep doing this. What’s going to happen to me?
June 25th, 2009 at 12:56
As a co-signer, will I still be liable if something happen to my child or person deceased (hope nothing happen just a curiosity)?
July 22nd, 2009 at 11:52
I stupidly co signed a loan, while in a separation with my Ex Wife. We were seperated, and separation papers said i was not supposed to enter any agreement of any type for a loan with her. I did. 6 months later, we divorced, and on the Court agrement, the part that suggest, PROPERTY AND DEBT, the vehical that the loan was attached to, was said to be hers. Now she has defaulted, claimed bankruptcy, on the older law, where as the debt was cleared from her name. Now i have a $17,000.00 debt on my credit. Am i responsible for this?
September 9th, 2009 at 15:08
how soon after I’ve co signed for my daughter’s car loan, can I remove myself from the loan….???
May 21st, 2010 at 14:55
I need some help please! Approximately two years ago, I signed some loan paperwork for my daughter’s career training. She borrowed almost $10,000.00 from Sallie Mae. She went to school to become a dental assitant, she did graduate, but up until now still can’t find a job and she’s still without a job. According to my daughter, she has been making payments to Sallie Mae for what ever amount that she can afford, and of course Sallie Mae is very unhappy about it. They recently changed the loan into my name as a primary person instead of a co-signer; which I have no clues why and they have also threatened that they will turn me into at least one of the credit bereaus. Now, what I worry is are they going to have any rights to take anything that I have or own away from me without my permission or knowledge? Is there anything that I can do, since I feel that I shouldn’t be responsible for this loan and I wasn’t the borrower? Please help! Thanks!
June 22nd, 2010 at 14:01
where can I get a legitimate bad credit car loan?
November 8th, 2010 at 18:18
Dear,
I cosigned for my Ex-wife, and after a while she gave up the mobile home without my knowledge. Now the bank goes after me for the large amount of money. What do I need to do?. I do not have that much money to pay them.
Thanks,
August 6th, 2011 at 19:40
I have been asked to co-sign for a college loan for my niece. As my brother has bad credit and was denied the loan he turned to me. Although he does not need to re-pay the loan till after she graduates, not until 2013, does my credit rating immediately get downgraded because I co-signed today or does my credit rating go down when he has to start re-paying the loan and it exists for the life of the loan? I mean from 2011 till 2013 is my “excellent” score “excellent” or am I immediately lowered because his score is low? Thanks.
September 21st, 2011 at 11:26
I wish I had read this before I helped my sister.But I have a question since I co-signed she has been late on every payment and sometimes I wonder if she is going to pay!Let me explain the only way I would sign,I make the payment and she has to pay me that way I know the payment is on time and not late.What rights do I have?Can I go get the car that I am paying for,she refuses to pay full amount plus is extremely late every month if she pays at all!I hate to waste my money on something I don’t have,times are to hard.It’s a shame!!!
February 3rd, 2012 at 14:10
I’ve cosign for a friend back in the 2008 and that loan got default in late 2010. I was unemployed for a while so i could not make the payment on it, so the loan got default. This really kill my credit score (585). At this point wat step can I take to improve my credit score? and how long would the loan stay on my credit record? or is there a way I can take it off the record? Either by repaying for that loan or what are some recommendation?