Co-signing a loan for someone is more than just a favor. It’s a binding financial commitment—one that could have both immediate and long-term effects on your credit score. If you’re considering co-signing a loan, think very carefully about the risks involved.

What a Co-Signer Does

When you co-sign a loan, you’re telling the lender that if the primary borrower doesn’t pay the money back, you will. For example, if a relative needs to acquire an auto loan for a car, but doesn’t qualify for a loan on their own because of their limited credit history, and you co-sign the loan, the lender may look at your credit report and credit score to approve the loan based on your qualifications rather than your relative’s.

Co-Signers are Equally Responsible

Co-signing a loan doesn’t give you partial responsibility for the loan—you and the primary borrower are equally responsible. As such, the loan will appear on your credit report, as well as the primary borrower’s, and will be factored in to your credit score as well as theirs. While you may not officially think of the loan as being yours, as far as your credit report and credit score are concerned, it’s just as much your loan as the primary borrower’s.

Risks to Your Credit Score

A portion of your credit score is tied to the total amount of debt in your name. A co-signed loan will increase your total indebtedness, and therefore, can affect your score. An influential factor for your credit score is your payment history which includes the payments on a co-signed loan even though you’re not the one making the payments (or failing to make them). If the primary borrower makes a late payment, or misses a payment, it will be reflected on your credit report and can have a negative impact on your credit score.

Worst-Case Scenario

A co-signer’s worst nightmare is when the primary borrower stops making loan payments. When this happens, the lender is going to go after the co-signer for payment—which is you. And as a result of the primary borrower failing to make their loan payments, your credit score may have already suffered. Moreover, you will either probably be obligated to pay off the loan or allow the account to go into default if you’re unable to make payments.

As a co-signer, depending on the type of loan involved, you could end up with a collections action, a foreclosure, a lien or repossession on your credit report. You could also be sued. This array of risks underscore the fact that the decision to co-sign should not be taken lightly.


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About the Author

Cam Merritt has been a professional writer and editor since 1992, specializing in articles about personal finance and law. He has contributed to USA Today and the Better Homes and Gardens family of magazines and websites. Merritt has a Bachelor of Arts in journalism from Drake University.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.