Will Cosigning A Loan Affect My Credit Scores?

The short answer is yes, cosigning a loan can have an impact on your credit scores. Cosigning a loan on its own won’t have an immense impact on your credit. If the lender does a hard check of your credit, this can impact your credit scores by a few points.

Where you might see the most impact is how the loan is handled. If payments are late or missed altogether, this behaviour will likely be reported to one or more credit bureaus and then have an impact on the calculation of your credit scores.

What Does Cosigning A Loan Mean?

A cosigner on a loan agrees to repay the loan if the primary lender ceases to make payments or defaults on the loan. By cosigning a loan, you aren’t responsible for the payments on a regular basis, but you become involved in the event that the primary lender experiences financial difficulty.

People make use of a cosigner if they have poor credit, lack of credit history, little income, or are under risky circumstances in the eyes of the lender, for example, being a student. Basically, in any situation where the primary lender is a risky candidate for a loan, a reliable, less risky cosigner can be used to help the primary lender obtain a loan. It is rather common practice for parents, spouses, relatives, siblings, and even close friends to cosign loans.

What Can You Do If The Borrower Defaults On The Co-Signed Loan?

If the primary borrower defaults on the loan, it can not only negatively affect your relationship with them but your credit scores may also be negatively affected.

While several factors play a role in determining your credit scores, payment history matters the most. If the borrower misses their loan payments, that will be noted on your credit report. Since your name is on the loan, you’ll be just as affected by the missed payments as the primary borrower.

If the borrower defaults on the loan, you’ve got a couple of choices:

Pay Off The Loan Yourself

If the borrower fails to keep up with payments, you’d be obligated to take over the loan payments as the co-signer. Unfortunately, even though you’re the one repaying the loan, you won’t have any stake in the asset, whether it’s a house, car, or money.

Allow The Loan To Default

If you’re financially incapable (or unwilling) to pay off the loan on your own, the loan will default. When this happens, your credit report will reflect this default, which can negatively affect your credit. More specifically, loan defaults can stay on your credit report for up to 6-7 years, which will make it difficult to get approved for a loan in the future.

Neither one of the above scenarios is a positive one, which is why it’s crucial that you think carefully about taking on the responsibility of being a cosigner before you co-sign the loan.

If You Cosign A Loan, Will It Show Up On Your Credit Report?

Yes, if you cosign a loan it will appear on your credit report as well as the primary lender’s credit report. The loan will appear on your credit report because you’ve made a commitment to repay the loan should something go wrong, even if you don’t intend to pay a cent. The cosigned loan will increase your total debt load and increase the number of accounts with balances.

It’s important to note that if the cosigned agreement is a lease, as opposed to a loan, it will not appear on your credit report. A lease is not technically debt because no loaned money has exchanged hands, it is merely an agreement to pay a specified amount for a given period.

Will CoSigning A Loan Negatively Affect Your Credit Scores?

Cosigning a loan can affect your credit scores because of two reasons:

When you cosign a loan you take responsibility for it in the event the primary borrower defaults.
The cosigned loan will appear on your credit report. This means that negative remarks like late or missed payments will show up on your credit report which can negatively impact your credit scores.

What Type Of Negative Remarks Can Affect Your Credit Scores?

A secured loan is one that is backed by an asset of value, such as a house or vehicle. As mentioned above, your credit scores may be damaged if the loan payments are missed, and there are 3 ways this can happen with a secured loan:

Late payments. A payment that is more than 30 days overdue may be reported to the credit bureaus by the lender. Late payments that are recorded on your credit report can hurt your credit scores.
Asset repossession. If you and the primary borrow continue to miss payments it could lead to the lender repossessing the asset secured against the loan, such as a vehicle or house. If the vehicle or home you co-signed for is repossessed by the lender, this may have a negative impact on your credit scores.
Account sent to collections. When loan payments are missed, the lender may get a collections agency involved to go after the borrower in default. Since you’ve co-signed for the loan, a collection account will be opened on your credit report which, in turn, can hurt your credit scores.

Will Cosigning A Loan Help Improve My Credit?

If the loan is managed effectively, both the primary borrower and cosigner can improve their credit. Since the cosigned loan shows up on both credit reports, on-time payments may help improve your credit scores, just as late payments may reduce your scores. Even though you’re the cosigner and not directly associated with the payments, it’ll still show up on your credit report, which may help improve your credit scores.

Additional Reading

Will CoSigning A Loan Affect Your Ability To Borrow?

If you plan on applying for a new loan soon, the existing debt from the cosigned loan could affect your ability to get approved for a loan. Lenders often consider what you potentially owe (i.e. the total amount of the loan you cosign) because it could impact your ability to repay them in the future. The added debt from the cosigned loan will make you a risker borrower which may also lead to a higher interest rate.

Why Do Lenders See Cosigners As Risky Borrowers?

As a cosigner, you’re responsible for the missed payments and repaying the loan if the primary borrower can’t. This in turn makes you a riskier borrower, as it can impact your ability to repay any new loans you wish take out on your own.

Co-Signed Loans And Credit Score FAQs

Can co-signing a loan positively affect my credit?

Yes, being a cosigner can help you build your credit scores as long as the loan payments are being made on time and in full every billing cycle.

Does co-signing a loan affect my debt-to-income ratio?

Yes, being a co-signer increases your debt-to-income ratio because you’re adding more debt to your profile. The loan you co-sign is tied to you, as well as the primary borrower. In the eyes of the credit bureaus, the borrowed funds are just as much yours as they are the borrower’s. For this reason, the added debt will affect your debt-to-income ratio.

Can I remove myself as a cosigner?

In order to be removed from the loan as a cosigner, you’ll need to review the contract to see if there is a clause that allows you to take your name off the loan. If not, removing yourself as cosigner can be challenging. One way to remove yourself as a cosigner would be to refinance the loan, in which case the borrower would have to qualify for a new loan on their own. Otherwise, the loan would have to be paid off in full in order for you to be relieved of your co-signing duties.

As a cosigner, do I have any legal rights to the loan?

No, as a cosigner you will not receive any part of the loan or have any legal ownership over the title (if the loan is for a car or mortgage). You will be simply responsible for the repayment of the loan in the event the primary defaults on the loan.

Do I need good credit to be a cosigner?

Generally, lenders will only accept cosigners with good credit (660+). Similarly, the lender will also require the cosigner to have a high enough income to be able to cover the cosigned loan.

Should You Cosign A Loan

Cosigning a loan can either affect you positively or negatively depending on how it is managed. While helping out friends and family is great, be sure to consider all of the risks before agreeing to be a cosigner. Ideally, you want to be able to help out the primary lender without putting yourself in a troublesome situation, thereby hurting your financial situation down the road. If you do cosign a loan, remember that communication is key to ensuring that payments aren’t missed.

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Lisa Rennie

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!