Someone you care about needs a cosigner. Maybe it’s your kid financing a first car, or a sibling who can’t get approved alone. You want to help, or at least you’ve been asked to. Naturally, the first question that pops up is: Does cosigning hurt your credit?
It can. Whether it does depends largely on what happens after you sign. If payments are made on time, the loan may not have a major negative effect on your credit. If they aren’t, the damage can land on you too.
Here’s a rundown of what you’re taking on, and a few ways to help without cosigning a loan.
What Happens When You Cosign a Loan
When you cosign, you agree to repay the loan if the main borrower doesn’t. You’re not simply a character reference. You take on responsibility for the debt even though you may not receive the money or asset being financed.
This differs from being a co-borrower. A co-borrower typically shares the money or asset, like two spouses buying a car they’ll both drive. A cosigner usually doesn’t receive the benefit of the loan but still takes on responsibility for repayment.
A creditor can also report the cosigned loan to the credit bureaus as your debt. That means the account and its payment history may appear on your credit report. It can also affect how lenders view your existing debt obligations when you apply for credit of your own.
Does Cosigning Hurt Your Credit?
So does cosigning a loan affect credit directly? It can. Applying for the loan often involves a hard credit inquiry, which can have a small effect on your credit score.
The bigger risk comes if the borrower pays late or defaults. That history may appear on both of your credit reports. Most negative information about account payment history can generally remain on a credit report for up to seven years.
There’s no fixed number of points your score will lose. The effect depends on your overall credit profile and what happens with the account.
What You Are Actually Agreeing To
Under the FTC’s Credit Practices Rule, lenders generally must give cosigners a Notice to Cosigner before they become obligated on the debt. The notice explains that you may have to pay the full debt, including certain fees or collection costs, if the borrower doesn’t pay.
In many cases, the creditor also does not have to exhaust its collection options against the borrower before trying to collect from you. That can include collection activity or a lawsuit.
Some states provide additional protections for cosigners, so the exact rules may vary depending on where you live.
The Cost That Doesn’t Show Up on Your Credit Report
Numbers aside, cosigning can strain a relationship in ways that are hard to undo.
The borrower might miss a payment and not mention it. You could find out later through a credit alert, statement, or collection contact. At that point, there’s money tension on top of a relationship that mattered enough for you to sign in the first place.
The financial responsibility is worth considering separately from your trust in the person asking you to cosign.
How Do I Protect Myself as a Cosigner?
If you’re considering cosigning, a few steps can help you understand the risk before you sign:
- Read the loan terms in full, and ask the lender what you’d owe if the borrower defaults.
- Ask whether you can receive copies of statements or payment alerts so you’re more likely to know about a missed payment quickly.
- Check whether the loan offers cosigner release. Some loans allow a cosigner to be released after certain requirements are met, but availability and eligibility depend on the lender and loan terms.
It can also help to consider whether the borrower could realistically afford the loan and whether you could cover the payments yourself if you became responsible for them.
Signs Cosigning May Carry More Risk
- The borrower has missed payments before, has unstable income, or can’t clearly explain how they plan to repay the loan.
- You don’t understand the loan terms or what would happen if the borrower stopped paying.
- Taking responsibility for the debt could interfere with your own ability to cover expenses or qualify for credit.
Alternatives to Cosigning a Loan
Helping someone doesn’t necessarily require putting your name on their debt. Other possibilities may include:
- Help them understand why they weren’t approved. A denial may point to an issue such as limited credit history, existing debt, or another lending requirement.
- Offer limited help you can afford. A one-time gift or help with budgeting and application paperwork can provide support without making you responsible for the entire loan.
- Help them research other options. Depending on the situation, that might mean comparing lenders or exploring ways to build credit before applying again.
- Consider waiting. The borrower may be able to improve their credit or income and apply on their own later.
These approaches may allow you to help without becoming legally responsible for someone else’s loan.
So, Is Cosigning Worth It?
Whether cosigning is worth the risk depends on the loan, the borrower, and your own financial situation. Cosigning is more than helping someone qualify: you’re agreeing to take responsibility for a debt that could affect your credit and finances if the borrower doesn’t pay.
Before signing, make sure you understand the loan terms, what the lender can require from you, and what taking on the debt could mean for your own finances.
