No Good Deed Goes Unpunished: Cosigning and Bad Credit
By Richard BarringtonMortgage Credit Problems Columnist
With lending standards being tightened, more borrowers may be seeking assistance in the form of cosigned loans. Circumstances can include helping a young person to get a loan for the first time or enabling someone with bad credit to get a loan at more favorable terms. The benefits are clear for the person obtaining the loan, but these should be weighed against the drawbacks for the person cosigning. If someone asks you to cosign on a loan, know what the consequences can be. This is not only so you can weigh the merits of the decision yourself, but also so you can properly explain the situation to the would-be borrower. Everyone involved should understand that cosigning a loan can cost you financially and in terms of missed opportunities.
On the Hook: Cosigning Affects Your Credit Rating
Lenders require cosigners to act as a safety net when they are unsure of the creditworthiness of a borrower. This uncertainty may be because the borrower is young and has little history of earning an income and making payments. Cosigning for a loan can help that person establish a credit history and make needed purchases.
Another reason behind co-signing is bad credit on the part of the borrower. If the opportunity to buy a badly-needed car hangs in the balance you might be tempted to help this person out. However, having to repay the loan in full if the borrower defaults is not the only pitfall of co-signing.
Unintended Consequences
Even if the borrower doesn't default, the obligation does show up on your credit report and can affect your own finances--if, for example, you wish to complete a mortgage refinance and the underwriter spots the co-signed loan on your credit report. The payment will either be included in your debt-to-income ratios, making it harder for you to qualify, or you will have to prove that the borrower is making the payments on time (meaning that you will probably have to get canceled checks from him/her to show that it's not you making the payments).
Worse than that is the fact that if the borrower misses payments or defaults on the loan, the derogatory history glues itself to your report as well--and down goes your credit score! In short, reasons for cosigning can be compelling. However, reasons against cosigning are also powerful, so pick your spots with great care.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
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