What happens when you cosign for a loan from another person

In life there are times that you might be asked to co-sign for a credit card or a loan. While tempting there are a few points to consider before taking the plunge. Co-signing a loan is a commitment, and there are ramifications to that commitment which you should be aware of.


When you Co-sign did you know that you are the borrower as well?
As far as credit bureaus are concerned once you co-sign you borrowed the money. The loan information will appear on your credit report as well as the credit report of the person you co-signed for. If the person you co-signed for is late even on one payment, it will effect your credit score as well. I have seen friends credit scores singularly ruined and utterly destroyed just from co-signing one loan that went bad.

If in the future you need a loan yourself, the loan you co-signed for is going to come back and haunt you if the loan is still outstanding. The loan or credit card you co-signed for can negatively affect your chances of obtaining a new loan or if you do get approved for said loan you might find yourself with a higher interest rate than you would have had otherwise, largely due to your now higher debt-to-income ratio.

Also if the person you co-signed for defaults on the loan you are now on the hook for the remaining balance or your credit will suffer accordingly. The FTC or Federal Trade Commission commissioned studies which have shown that out of all loans that had co-signers that ended up in default approximately 75% end up being paid in full by the co-signer. This means that out of all co-signed loans that go bad, 75% of the time the co-signer is left to pay the balance off. So while you would be helping your family or friend obtain a loan, you are fully responsible if the loan goes unpaid by the primary borrower.

If you are intending to co-sign for your child by all means do so if it is to help them build credit and to help them learn how to manage credit. Yet if you do so my advice would be to set the credit limit low enough that you could easily afford to repay the debt without any ill effects on your own finances. If the co-signing is for a credit card you can ask the credit card company to set whatever limit you feel is right. Also have a sit down with your child and explain how credit works, and the effects it can have on your credit score in the event that you do not pay back the loan in full.

You can protect yourself when co-signing for a credit card or a loan however. You can request that a clause be added to the loan agreement stating that you are only responsible for the loans principle rather than any interest. You can also have it added in that you be notified in the unfortunate event of a missed payment on the loan. You should also learn your states laws regarding a co-signer’s legal obligation as these laws of course vary from state to state. This article was not meant to deter people from co-signing for friends and family but rather to inform people fully of the responsibility they are taking on.

Author: Don

Covering the financial markets since 2005. Love to learn and share ideas and tips. The best articles come from ideas presented by users of this website. Topics that we find interesting include personal finance, credit cards (especially awesome balance transfer and rewards cards), small business financing and loans for debt consolidation.