Key Takeaways
| Factor | Impact on Credit Report |
|---|---|
| Credit Score | Can increase or decrease based on payment history. |
| Debt-to-Income Ratio | Increases, making it harder to qualify for future loans. |
| Missed Payments | Can damage your credit if the primary borrower fails to pay. |
| Loan Responsibility | You’re legally responsible for the debt if the borrower defaults. |
| Credit Report Duration | The loan stays on your report for its entire term. |
How Cosigning Affects Your Credit
Your Credit Score Can Improve or Decline
When you cosign a loan, the lender reports it to credit bureaus under both the primary borrower’s name and yours. If the borrower makes on-time payments, this can boost your credit. However, if they miss payments, your credit score will take a hit.
Your Debt-to-Income Ratio Increases
Cosigning means you take on additional debt, even if you’re not making the payments. Lenders consider this when evaluating your ability to take on new credit, which can make it harder to qualify for loans, credit cards, or even a mortgage.
Missed Payments Hurt Your Credit
Late or missed payments appear on your credit report just as if you had taken out the loan yourself. If the borrower fails to pay, the lender will seek payment from you, and if the account becomes delinquent, it can remain on your report for up to seven years.
You’re Fully Responsible for the Loan
As a cosigner, you’re just as responsible for the debt as the primary borrower. If they default, the lender will demand payment from you. This can lead to collection actions, lawsuits, and even wage garnishment if the debt goes unpaid.
Loan Stays on Your Credit Report Until Paid Off
The cosigned loan remains on your credit report for the duration of the loan term. If the borrower refinances the loan in their name alone, the loan will be removed from your report, but otherwise, it stays until it is fully paid off.
How to Protect Your Credit When Cosigning
- Monitor Payments – Set up alerts or request access to the account to ensure timely payments.
- Have a Backup Plan – Be prepared to make payments if the borrower falls behind.
- Consider a Cosigner Release – Some lenders offer cosigner release options after a period of on-time payments.
- Know the Risks – Only cosign if you are financially stable enough to cover the loan if necessary.
Cosigning is a generous act, but it comes with serious financial risks. Always weigh the pros and cons before agreeing to cosign for someone else.
Frequently Asked Questions (FAQs)
Does cosigning a loan affect my credit score?
Yes, cosigning affects your credit score just like if you had taken out the loan yourself. If the primary borrower makes on-time payments, your score may improve. However, late or missed payments will negatively impact your credit.
Can cosigning a loan prevent me from getting a loan?
Yes, cosigning increases your debt-to-income ratio, which can make it harder to qualify for loans, mortgages, or credit cards in the future.
Am I responsible for the loan if the primary borrower stops paying?
Yes, as a cosigner, you are legally responsible for repaying the loan if the borrower defaults. The lender can take legal action against you for the unpaid debt.
How long does a cosigned loan stay on my credit report?
A cosigned loan remains on your credit report for the entire duration of the loan term. If the borrower refinances or pays off the loan, it will be removed from your report.
Can I remove myself as a cosigner?
Some lenders offer a cosigner release option, but the primary borrower usually must make a certain number of on-time payments and meet credit requirements before the lender will approve the release.
What happens if the borrower misses a payment?
Missed payments appear on your credit report and can lower your credit score. It’s important to monitor payments and address any late payments immediately.
Does cosigning help build my credit?
It can, but only if the borrower makes on-time payments. Positive payment history is reported to credit bureaus, which may help improve your credit score.
Can a cosigned loan go to collections?
Yes, if the borrower defaults and neither of you make payments, the loan can go to collections, damaging both your credit scores.
Will lenders notify me if the borrower misses a payment?
Not always. Some lenders notify cosigners, but others do not. It’s a good idea to regularly check the account or set up alerts to stay informed.
Is there a way to reduce my risk when cosigning?
Yes. You can ask the borrower to refinance the loan in their name once they qualify, request a cosigner release, or ensure you have a financial plan in case they miss payments.
Contact us for a free consultation today
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