When your friend or family member is in a difficult financial situation, they are likely to apply for a personal loan to get some extra cash. However, a bad credit score may disqualify them from borrowing. If it happens, people generally ask for help from their closest friends or relatives. What should you do if a person you know asks you to cosign a loan? Does being a cosigner affect your credit? In the article, you can find answers to these and many other questions about co-signing a loan.
Why Would a Borrower Get a Cosigner for a Loan?
As a rule, people with a bad or poor credit score ask those with good credit to obtain the necessary amount. Cosigning a loan with somebody with a positive payment history makes a borrower’s application more attractive to a lender. It results in higher approval chances, lower interest rates, and more favorable loan terms.
However, co-signing a loan for another person means taking financial responsibility for their debt. If a borrower doesn’t repay the debt on time, their obligations are transferred to you. It is crucial to be prepared to cover the loan if your friend or relative can’t do it. For example, in California, people borrow $255 payday loans online on the same day to protect their credit scores from being decreased. Online lenders allow you to get approved with no hard credit check and get cash directly to your bank account within 24 hours.
Does Cosigning Affect Your Credit?
Yes, cosigning a loan impacts your credit score, as all the payments are sent to the credit bureaus. The effect totally depends on the primary borrower. If they make full and on-time payments for their loan, your credit will rise. However, late or missed payments will negatively affect your credit report.
Pros and Cons of Cosigning a Loan
Regardless of the type of loan that you may be asked to cosign (car loan or any other auto loan, student loan, personal loan, installment loan, etc.), it is crucial to understand all the pros and cons of being a co-signer.
Pros
When your close person asks you to co-sign a loan with them, you can enjoy the following benefits:
- A cosigned loan may improve your credit score if a primary borrower makes all the loan payments on time.
- It is an excellent way to help your friend or family member who is experiencing financial hardship.
- Cosigning a loan for another person can significantly improve your relations with them.
Cons
Although cosigning a loan can bring you some benefits, it is still risky and may come with several drawbacks:
- Missed or late payments for a loan can have a negative impact on the borrowers’ credit scores. Late payments and collections accounts can stay on their credit reports for up to seven years.
- You may be obliged to pay off the rest of the debt, as you are legally responsible for it.
- Your good relations with the borrower may get worse if they stop making on-time monthly payments.
In several cases, it is better to refuse to co-sign a loan to protect your credit report. If your close friend or relative does not qualify for traditional loans, they can consider bad credit loans with guaranteed approval of $1,000. This amount is usually enough to cover minor financial expenses, such as car or home repairs, medical bills, etc. Many lenders can approve borrower’s requests despite their poor or bad credit scores. In such cases, looking for a co-signer is unnecessary.
What Is the Difference Between an Authorized User and a Co-Signer?
Although these terms have many similar elements, an authorized user is not the same as a co-signer. Authorized users of somebody’s credit cards can make purchases from them without being responsible for paying off the debt. If you cosign a loan with another person, you take their financial obligations and risk hurting your credit history if they miss loan payments.
How to Protect Yourself When Co-Signing a Loan?
You may be asked to cosign a loan if the primary borrower’s credit is worse than yours. If you want to help somebody with co-signing a loan, it is crucial to understand several basic things to protect yourself and not hurt your credit.
First, co-sign a loan only for the person you know well and trust. Make sure this person will make every monthly payment for a loan on time. Second, learn carefully all your financial obligations as a co-signer to avoid any surprises. Third, prepare enough money to pay off the debt if your family member or friend misses the payments.
The Bottom Line: What Will Happen with Your Credit Report After You Co-Sign a Loan?
Does being a cosigner affect your credit? The answer is “Yes!”. Co-signing a loan may be beneficial for the borrower’s credit reports. It allows you to diversify the types of your credit accounts (revolving credit, installment loans, and others), positively affecting your credit mix. As a result, it will positively impact your credit history.
Regularly making on-time payments for the debt by a primary account holder will also help you build credit and improve your credit score. However, the situation is not always positive, and being a co-signer may also hurt your credit.
The worst case scenario is, for example, when you need to pay off the rest or even the entire debt for the borrower and don’t have funds for it. It can be a significant red flag for your future lenders, which may decrease your approval chance and lead to worse loan terms. Therefore, being a responsible co-signer is crucial and will help you avoid many unpleasant situations.
