Co-Signing A Loan Can Affect Your Credit Score

Weigh up the responsibilities of co-signing a loan

Co-Signing A Loan Can Affect Your Credit Score
January 9, 2017

It was once common for friends and loved ones to help each other by co-signing a loan, whether this was a small personal loan or something larger, like a mortgage. Those days are over, though, with lenders demanding greater obligation from co-signers. The term co-signing is now known as co-borrowing, and the responsibility for repaying debt falls on both parties.

Co-borrowing is a huge commitment and Americans must realize that they are responsible for that debt until the loan is paid. This can also have a negative effect on credit scores. For example, helping your child to purchase a home might seem like a good idea, but if they miss a couple of repayments, it can affect your credit score as a co-borrower. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.

"You are agreeing to be 100% responsible for that loan if the other person doesn't pay. The lender is under no obligation to tell you that the person you co-signed for isn't making the payments, so you have to stay on top of it," advises Nav Head of Market Education Gerri Detweiler. "You could either request online access for the accounts, you could see that the payments are being made, or follow up and look at the billing statement. But remember, if that person you co-sign for doesn't make the payments, you are on the hook."

There is no hard evidence on how many people's credit scores have been affected by late mortgage payments on co-borrowed loans. Industry expert Matt Schulz said that other loans, such as personal loans, student loans, and auto loans, give an overall view, with roughly a third of co-borrowers claiming that it damaged their credit score. He adds that several people do not realize the long-lasting consequences of missed payments or other mistakes. "When you co-sign, you've got about a 40 percent chance of losing money and about a 25 percent chance of damaging the relationship with the person that you co-signed with," said Schulz.

This is not to say that co-borrowing is necessarily bad. It is vital, however, for anyone considering co-signing a loan to assess the risks and understand the potential consequences.

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Photo ©iStockphoto.com/BernardaSv

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