Will Cosigning A Loan Affect My Credit Score?

Will Cosigning A Loan Affect My Credit Score?

Written by Veronica Ott
Fact-checked by Caitlin Wood
Last Updated November 22, 2021

The short answer is yes, cosigning a loan will have an impact on your credit score. Cosigning a loan on its own won’t have an immense impact on your credit, although, how the loan is handled will determine the weight of the impact and whether the impact is positive or negative.

Wondering what types of loan you can get with a cosigner? Find out here.

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.

If I Cosign A Loan, Will It Show Up On My 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, increase your total available credit (lower is better) 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.

Your credit report might be scaring away lenders, click here to find out why.  

If The Primary Lender Misses A Payment, Will It Negatively Affect My Credit Score?

In a general sense, credit scoring models don’t distinguish the primary lender from the cosigner. This means yes, late or missed payments will negatively impact both individuals equally. Consider this, as a cosigner, you agree to make payments when the primary lender can’t meaning that both individuals must default on a payment to incur adverse effects in terms of credit. On the flip side, if the payments are always timely and full, the effect on both individuals’ reports will be equally positive.

How to remove yourself as a cosigner on a loan?

Will Being A Cosigner Help My Credit And The Primary Borrower’s Credit?

If the loan is managed effectively, both parties can improve their credit. Whenever a loan is paid on time, your credit gets better, even if you’re the cosigner and not actually associated directly with the payments. The primary lender will benefit especially if they have never used credit before or have several negative items within their credit history.

Check this out to discover more ways of improving your credit score.  

Cosigning a loan can also improve the status of the “credit mix” component of your credit score. The more varieties of loans types you have, the better your credit score will be. The credit mix is a small component of a credit score but every little bit helps.

If I Cosign A Loan, Will It Affect My Ability To Borrow On My Own?

If you plan on applying for a new loan soon, the existing debt from the cosigned loan could hurt you because you will be considered riskier and thus may not get approved or may get a higher interest rate. Lenders consider what you potentially owe, as opposed to definitely owe because it could impact your ability to repay them in the future.

If the primary lender on the loan misses a payment or stops paying altogether, this could have an immense impact on your ability to borrow on your own. Payment history is one of the most important factors that lenders consider therefore any discrepancies could harm you. Of course, as a cosigner, you’re responsible for the missed payments and repaying the loan if the primary lender can’t, although things can happen, such as losing your job, that might impact your ability to repay the loan.

To Cosign Or Not To Cosign?

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 cosign the loan. 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.

Rating of 4/5 based on 4 votes.

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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