Co-signing a loan for a friend or relative is a large financial commitment with significant credit score implications. By agreeing to act as a co-signer, you commit to fulfill the payments of the primary borrower’s debt should he or she fail to do so.
Co-Signed Loans and Your Credit Report
As a co-signer, the debt appears on your credit report regardless of the loan’s status. Another trade line is added to your report and all the loan details will be recorded, such as amount borrowed and payment history. These details can directly affect your credit score and thereby your ability to obtain financing.
What if the Borrower Defaults?
You are equally responsible for the status of the loan you co-signed. Any payments the primary borrower misses are delinquencies recorded your credit report as well. In certain circumstances, the lender can legally require you to repay the debt or initiate collection proceedings against you to reclaim the remaining funds. However, lenders’ policies vary on taking action against a co-signer.
The Federal Trade Commission (FTC) estimates roughly three out of four people who co-sign loans are asked to repay the balance if the primary borrower defaults. According to the FTC, in some states lenders are allowed to bypass the primary borrower and try to collect the balance directly from the co-signer.
Protect Your Credit Score
If you make the decision to co-sign a loan:
Make sure it’s the best decision for your own credit.
Ensure you have a trustworthy partner.
Stay involved in the process to ensure the balance is being paid on time.
Ask the borrower to provide you with a detailed repayment plan.
Even though you may be doing it for another person’s sake you need to think about your own capacity to take on more debt. If you decide to get involved, stay active and keep records of all the information relating to the loan. Ultimately, it is your responsibility, so ask to be included in communication from the lender, in particular, e-mail alerts for late payment.