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.
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 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:
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.
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.
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.
Cosigning a loan can affect your credit scores because of two reasons:
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:
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.
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.
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.
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 has been working as a personal finance 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.
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