Blog | Co-signing a Loan: Perks and Risks

Sometimes, a person’s credit score, credit history, or even earnings are not favorable enough for a loan. For example, a young adult going to college with no credit history and part-time pay asks a parent to co-sign on an auto loan, personal loan, or credit card to help them get approval.

When this happens, we use the co-signer’s creditworthiness and salary and combine it with the applicants to tip the scale in their favor. A co-signer can influence a loan decision because the co-signer is just as liable for the loan as the loan owner is. Therefore, you can think of co-signing as having the same responsibility as applying for the loan yourself.

There are many benefits and risks when co-signing. Here is somethings to think about before jumping into a big decision.

Advantages

• • You can help a loved one get approval for a loan.
  • The loan owner can get a better rate on their loan.
  • The loan owner has the opportunity to build or rebuild their credit.
  • As long as the loan is paid on time and has no missed payments, this loan could help build the cosigner’s credit and payment history.

Disadvantages

• • If the loan owner defaults, the cosigner is responsible for paying the loan.
  • Your credit can be torn down easier than it can be built up. Late payments, missing payments, report directly to your credit score.
  • This loan counts as an unpaid debt on your credit report. This adds to your debt-to-income ratio and can affect future loan decisions.
  • In the event you need to remove yourself from the loan, the loan owner will need to be able to refinance the loan in their name. If they are not able to do so, you’re stuck on the loan until it’s paid off.

There is also the relationship to think about with these main pros and cons. How well do you know this person, do you trust them, and will this destroy your relationship if the loan goes south?

Before you make this decision, consider these possibilities. Remember, if you plan to co-sign, the loan is just as much your responsibility as the loan owner.