Affect on Credit when Co-Signing A Loan

How is my credit affected if i co-sign on a loan for a family member?

2 Answers

Your credit will essentially be affected the same as your family members especially if he or she does not pay the loan on time.

If for any reason that loan goes into default, you will also be responsible for repayment and they can come after you just like your family member.

Mortgage related, this will affect your DTI, some lenders will allow you to provide canceled checks or other proof that you are not paying the debt, but in this market, don't count on that.

Overall, if you can trust the person and you are not looking to get any new credit, you can probably get away with co-signing. Personally, I would not take the chance unless it was a necessity.

Be very careful when deciding to co-sign a loan for someone.

Co-signing a loan for someone, as far as the credit reporting agencies are concerned, is like incurring brand new debt of your own. Any time you get new credit, your score will go down a little bit and gradually go back up with time and a timely payment history. So, just co-signing, in and of itself has an impact on your credit score.

Beyond that, what matters is how the principal obligor, i.e., the person you co-signed for, repays the debt. Any activity on the co-signed account -- whether a late-pay, a car repossession, foreclosure etc. -- goes on your credit report as if it were your own. The results could, potentially, be disastrous. Keep that in mind when deciding whether to cosign for someone. Also, find out why the person needs a co-signer in the first place. If it's because they have horrible credit as a result of not paying their bills in the past, their behavior will probably not be any different than the debt they are asking you to cosign.

The other thing to take into consideration in deciding whether to co-sign for someone is whether you plan on making any significant purchases of your own in the next twelve months. If you are thinking of buying a house, for example, the lender will look at all of your monthly obligations -- including the debt you co-signed for someone else -- in determining whether to extend the credit you desire.

Here's how it works: Let's say you make $10,000 a month before taxes. You want to buy a house that has a monthly mortgage payment of $3,000 with taxes and insurance included. You have no other debt. If the lender requires debt-to-income ratios of 30% (3000 house payment divided by 10,000 income equals 30%), you're ok. If on the other hand, you just co-signed a car loan for your favorite niece or nephew that has a $500 monthly payment, you're out of luck unless you can show that it's a co-signed loan and that the principal obligor is making the required payments on time. Most lenders will require the ten most recent consecutive cancelled checks to prove it. Thus, unless the monthly payment is very small in comparison to your monthly income and other obligations don't think twice -- think three times -- before you co-sign for someone else if you're thinking of buying a house in the near future.