Cosigning 101

What is a cosigner? 

A cosigner is someone who agrees to be legally responsible for a debt if the borrower doesn’t pay back the loan as agreed.  This reduces the risk for the lender and helps the borrower obtain a loan. Cosigning can be a benefit for borrowers with low income or limited credit history. Adding a cosigner can also improve the terms of the loan such as interest rate and qualify the borrower for a higher amount of principal. 

Generally, lenders are looking for a cosigner with a high credit score, a clean credit report and a long history of on-time payments. 

Can cosigning on a loan hurt my credit score? 

Yes. Once you assume responsibility for the debt, it’s yours. It becomes your loan and can be reported to the credit bureaus as your debt. It can limit your borrowing power as potential creditors look at your debt-to-income ratio. Depending on how much debt you already have, the addition of the cosigned loan on your credit reports may look like you have more debt than you can afford.  

If the primary borrower makes late payments or defaults, the bad credit history can show up on your credit report.

Other things to consider before cosigning. 

• Cosigning does not give you any title, ownership, or other rights to the property the loan is paying for. You’re there only to repay the debt if the primary borrower falls behind or defaults. 

• Before you pledge property to secure the loan such as your car, a savings account or a certificate of deposit make sure you understand the consequences. If the borrower defaults, you could lose them. 

The benefits of co-signing 

Obviously co-signing for a loan is most beneficial for the individual for whom you agree to co-sign. It can be a great way to help your child when they are just starting out. It can be difficult to get a loan or a credit card as a young adult without the credit history lenders use to determine if a borrower is reliable. Cosigning for your child allows them to start building credit while reassuring the lender they’ll get repaid.

Tonia Landsfeld

Loan Officer

This blog is not on behalf of Peninsula Federal Credit Union.