When you cosign for someone, you accept responsibility for the loan, lease, or other similar contracts if the original borrower is unable to pay as promised. Whatever you cosign will appear on your credit report as if the loan is yours, which may influence your credit scores depending on your credit history.
Cosigning a loan does not necessarily imply that your finances or relationship with the borrower will suffer, but it is not a decision to be taken lightly.
Before agreeing to assist, meet with the borrower to discuss the circumstances and the borrower’s plan to meet their financial responsibilities.
Make sure you understand what is expected of you as the cosigner and assess the benefits and drawbacks of this move on your relationship.
Take great care to discuss what would happen if the borrower cannot make their agreed-upon payments, and make sure they understand how this may also affect you.
What Are the Consequences of Cosigning a Loan?
The following are risks of cosigning a loan:
- You will have to pay the debt if the primary borrower does not. In some areas, the creditor may approach you first as a cosigner before approaching the borrower.
- You may also have to pay late fees or collection costs if you default on your loan.
- The creditor may utilize the same collection procedures as the principal borrower against you.
- If the primary borrower fails to pay and goes into default, your credit will suffer.
Cosigning on someone else’s debt may impair your capacity to obtain loans. The debt is regarded as yours, and it adds to your overall outstanding sum.
Cosigning a debt for a child may also reduce your estate or gift tax exemptions.
How Much Can a Cosigner on a Loan Be Held Liable For?
Before agreeing to co-sign on a mortgage loan, it’s critical to understand cosigner liabilities. You agree to bear responsibility for the loan as a co-signer if the principal borrower fails to make payments.
If the principal borrower fails to make numerous payments, you may be liable for the entire loan amount.
Before co-signing, ensure that the principal occupier you are vouching for has the financial means to pay the mortgage, insurance, and maintenance costs for their new home. You should also ensure you have enough money to fulfill the payments if the homeowner defaults.
You can take extra precautions to protect yourself from your primary occupant’s financial errors.
Consider the following actions if you agree to become a nonoccupant co-signer on a mortgage loan:
- Request that the principal occupant provides you with internet access to their mortgage statements.
- Request that the lender notifies you as soon as the principal occupant misses a payment.
- Set up a monthly premium or two in a savings account in case the principal occupant fails to make a payment.
- Maintain open lines of contact with the principal occupier. Encourage them to be honest if they believe they will be late with a payment.
Most importantly, only become a nonoccupant co-signer for folks you know are accountable. Never agree to co-sign on a loan for someone you’ve just met.
If I Cosigned, How Long Will the Primary Borrower’s Debt Exist in my Credit History?
If the information is accurate, debt can stay on your credit report for up to seven years.
Remember that creditors must notify you of your loan cosigner rights. Check that you understand the conditions of the notification.
When you cosign a loan, credit card, or rental agreement, you take on a legal obligation to make payments if the principal borrower can’t or doesn’t follow through. Cosigning can hurt your credit if:
- A payment is more than 30 days overdue: The creditor can report the late payment to the credit bureaus. Every late payment can then appear on your credit reports, lowering your credit score.
- The automobile that was cosigned has been repossessed: If the vehicle for which you cosigned is repossessed, it might harm your credit regardless of whether you utilized it.
- The account has been assigned to collections: Even if you were unaware that the primary borrower was behind on payments, a collection account might harm your credit. This can also happen with rental agreements, even if the landlord is not reporting on-time rental payments.
Opening a new account can also harm your credit score because it adds a hard inquiry to your credit report and lowers the average age of existing accounts.
These are minor scoring considerations, but you may see a drop in your results immediately after the account is opened and reported.
When Can Cosigning Aid in Credit Improvement?
Being a cosigner on a loan can also aid in the establishment and improvement of your credit when:
- Payments are received on schedule: Because payment history is an essential aspect of credit ratings, making all loan payments on time might help you improve your credit.
- The loan has been paid off in full: This demonstrates to potential lenders that you can manage credit responsibly.
- The new account will be added to your credit mix: Managing various types of credit, such as installment loans and revolving credit, can improve your credit score.
In conclusion, as long as the primary account holder manages the account correctly, cosigning can boost your credit.
What Is the Difference Between an Authorized User and a Cosigner?
Most credit card companies will not allow you to cosign for a credit card or accept joint applications. However, the principal cardholder may be able to add someone to their card as an authorized user.
An authorized user is issued a credit card in their name, which is connected to the principal cardholder’s account. The authorized user can then make purchases, which may enhance the account’s points balance if the card is a rewards card.
Authorized users, unlike cosigners, are not liable for the debt. Although you may have an informal understanding that the authorized user would pay for their transactions, only the primary cardholder is legally obligated to pay the total bill and amount.
Credit card issuers, like cosigners, can report authorized-user accounts to credit bureaus, which can help or hinder their credit.
Paying the monthly bill on time and maintaining a low credit usage ratio may boost the credit of both the primary and authorized user.
Late payments and huge amounts may harm their credit.
If you no longer want to be an authorized user on an account, you can remove yourself and have the account removed from your credit report.
What to Think About Before Cosigning
Aside from the potential influence on your credit ratings, there are other reasons why you should exercise caution before cosigning a loan.
- How will cosigning affect your relationship?: If they cease making payments, your relationship with the friend, family member, or partner may suffer.
- To assist, you must have good credit: In most cases, someone will ask you to cosign a loan because they are unable to qualify for a good deal on their own. However, you will only be able to assist if you have excellent credit.
- Cosigning can have an impact on your capacity to obtain credit: Lenders may include the payments you cosigned for when determining your debt-to-income (DTI) ratio and the influence on your credit scores. A high DTI can make obtaining a loan or line of credit more difficult.
- You are legally obligated to pay the entire loan: Cosigners are also liable for fees and collection costs incurred when account payments are missed. Creditors might sue you and garnish your salary or bank accounts in order to collect the unpaid debt.
- Your obligation does not end with your divorce: If you cosigned a loan with a former spouse, your legal liability for the debt does not end with the divorce decree.
Do I Need a Lawyer If I Am Cosigning a Loan?
Because cosigner rights differ by state, you should consult a financial counsel in your state about your cosigner rights. A financial lawyer can advise you on safeguarding your credit before, during, and after the cosigning procedure.