Being turned down for a loan can be discouraging, especially if you have little or no credit history to help you apply for another. To improve your ability to qualify for loans, you may consider asking a friend or family member to cosign on your loan. But does having a cosigner necessarily mean you’ll be improving your credit, and what will it do to your cosigner’s credit?
What is a cosigner?
A cosigner is an individual willing to assume responsibility for a loan because the primary borrower does not meet the qualifications of the loan on their own. A cosigner usually has better credit or a more stable income than the primary applicant, assuring the lender that the loan will be repaid one way or another. This means that the cosigner is required to make payments on the loan if the primary borrower does not, and it also means that the loan appears on their credit report, as does the payment history.
Who can it help?
A cosigner is especially helpful for a new borrower. As mentioned above, having little or no credit may make it difficult to be approved for a loan. Buying your first car or home may not be possible without a cosigner if you have little or poor credit. A cosigner may help you get a loan that can help you establish a positive payment history and build your credit.
Having a new type of credit on your credit report can help both the primary borrower and the cosigner. A car loan or mortgage adds installment credit which can improve your credit score by adding various kinds of credit, especially if you only have credit cards or lines of credit, which are types of revolving credit. The types of credit on your credit report makes up 10 percent of your score, and every bit helps.
Since payment history appears on both credit reports, on-time payments will be reflected positively on both credit reports, as well. But this also means that missed payments can hurt you both.
Who can it hurt?
Being a cosigner can be detrimental to your credit if the payments are missed and possibly if you decide to apply for your own loans. If you need a loan while you are a cosigner, the debt burden from the cosigned loan on your credit report may affect your ability to get a loan or a good interest rate if it seems you already have a significant amount of debt.
Also, if you cosign on a credit card or other form of revolving credit and the primary borrower keeps a high balance, this could also reflect poorly on the cosigner. Missed payments will also show up on the cosigner’s credit report, so staying aware and vigilant of due dates and making sure payments are made on time will only help both people on the loan.
It’s also important to realize that if anything happens to the responsible payer, the cosigner will be on the line for paying off the loan. Losing a job, a natural disaster, a car accident – anything that could affect their ability to repay.
Consider your relationship, and the responsibility
Entering a financial relationship with a friend or family member is a lot of responsibility, and can also affect your relationship. You will be attached to this person for the length of the term of the loan, for better or worse. Make sure you understand the obligation and also have a good idea of the other person’s ability to repay so that the experience is a win for you both.
Don’t hesitate to ask some personal questions about the primary borrower’s financial history. This affects you just as much as it affects them, so if their are any hesitations or past problems that could hurt you from cosigning, don’t feel bad about kindly saying no.
And if you are planning to ask someone to cosign for you, make sure you understand the gravity of what you’re asking, as well. Be fully prepared to make your payments and more than able to do so before asking. Be able to show the cosigner at the time of asking that you’re responsible, have a stable income, and will be able to make your payments. This ensures a solid relationship throughout the duration of the loan and will hopefully bring you closer together in the end, with better credit scores for you both as result.
For more budgeting and credit repair advice, visit our tips and tricks section.