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What Happens to Your Credit When You Cosign a Loan?

    

SUMMARY: Discover what can happen to your credit score if you cosign on a loan. Learn about the risks, of being someone's guarantor.

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Being a cosigner on a loan can really help the person who needs a guarantor to get a loan, or to get a loan with a lower interest rate. However, being a cosigner isn’t just about helping.

As a cosigner, you're just as responsible for repaying the full loan amount (and interest) as the person you’re cosigning for. Cosigning a loan then is a very serious business. If the borrower doesn't make their monthly payments on time, it will reflect negatively on your credit score. Of course, cosigning a loan can also have positive effects. If the borrower makes their payments on time and in full, it will reflect positively on your credit score, transforming average credit into good credit and good credit into great credit. Additionally, having a diversified mix of credit types (such as revolving credit, installment loans, etc.) can help to improve your credit score.

Read on to find out more about how being a cosigner affects your credit score.

Does Being a Cosigner Affect Your Credit Score?

Absolutely, your credit score is affected when you cosign a loan, and that effect can be positive or negative depending on the actions of the primary borrower. If the borrower makes their payments on time and in full, it will reflect positively on your credit score. However, if the borrower misses payments or defaults on the loan, it will hurt your credit score, and you’ll be on the hook for the loan.

The Pros and Cons of Cosigning a Loan

Cosigning a loan can be a great way to help out a friend or family member in need, regardless of the type of loan (e.g. a student loan, a car loan or other auto loan, a mortgage loan, a refinancing loan, or a personal loan). However, it's important to understand the risks and benefits before agreeing to cosign.

PROS:

  • If the borrower makes their payments on time, it will improve your credit score.
  • You may be able to help out a friend or family member in need.
  • Cosigning a loan can help to build or strengthen your relationship with the borrower.


CONS:

  • If the borrower misses payments or defaults on the loan, it will damage your credit score and you’ll end up with a bad credit rating.
  • You may be responsible for repaying the entire loan if the borrower can't or won't make their payments.
  • If the borrower doesn't make their payments, it could strain or end your relationship.

Considering the pros and cons, you should only cosign a loan if you're confident that the borrower will make their payments on time and in full. You should also be confident that you could make the payments on time and in full if for some reason you were required to do that.

How to Protect Yourself When Cosigning

If you're considering cosigning a loan, there are a few things you can do to protect yourself. First, make sure you understand the terms of the loan and all your financial obligations as the cosigner. Second, you should only cosign for someone you trust. Third, only cosign if you’re confident that you have the financial means to take over missed payments or even all the loan payments if for some reason that was necessary. (Not sure? Try out our loan repayment calculator to see if you can meet the financial obligations of a cosigned loan.) Finally, be sure to contact the person responsible for repayment any time they miss a payment. Don’t let late payments sneak by unaccounted for. Cosigning a loan can be a great way to help out a loved one in need. But protecting yourself is still essential.

Should You Cosign a Loan?

Ultimately, whether cosigning a loan is a good idea for you depends on your financial situation and relationship with the borrower. If you're confident that the borrower will make their payments on time and in full, then cosigning may not have any negative effects on your credit score. However, if there's any chance that the borrower may miss payments or default on the loan and you aren’t 100% sure you could pay it back, it's best to avoid cosigning.

Do you need a loan, a line of credit, or a credit card? Check your credit history with one of the primary credit bureaus (you can request a free one at annualcreditreport.com), then reach out to TDECU about interest rates and loan products today.

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