Co-Signing a Loan: What You Need to Know

Are you thinking about co-signing a loan? It’s a great way to help someone when they’re not able to qualify for credit on their own. However, it’s a serious undertaking. Before signing, make sure you are aware of all the consequences.

When Does Someone Need a Co-Signer?

One way for an unqualified borrower to secure credit is to have someone co-sign the loan application with them. Your child, for instance, may not have a credit history. If you have good credit, co-signing will improve the borrower’s chance of being approved. With you onboard, the lender might offer a better interest rate, making the loan more affordable.

How Does the Process Work?

The co-signing process is the same whether the borrower applies from an online loan platform or in person. The lender will evaluate your creditworthiness before accepting you as a co-signer. Both of you complete the application and affix your signatures. Once you do this, you agree to be responsible for repaying the loan.

Co-signing doesn’t make it a joint loan, though. You’re not a co-borrower, only a co-signer. Only the borrower has access to the funds, but you’re equally responsible for repayment.

Things to Consider Before Co-Signing

Co-signing a loan can be a great gift to your child or close friend. They’ll get the funds they need to pay for education or purchase a home or car. But there are risks involved.

1. The loan goes on your credit report too.

The loan amount and history of payments are recorded on your credit history. Payment history makes up 35 percent of your credit score. If the payments are made on time, no problem. It might even improve your credit score. If they’re late, your credit score will suffer.

2. You might not be able to get credit when you need it.

Co-signing a loan impacts your ability to get your own loan. Since the co-signed loan is recorded in your report, your debt-to-income ratio will be impacted. A creditor may decide that you are carrying too much debt and decline your application.

3. You’re responsible for repaying the loan.

The lender can take legal action against you. Some states permit the creditor to first collect from you before suing the primary borrower. Usually, lenders wait up to 180 days before taking legal action. Before co-signing, it’s good to consider the worst-case scenario—the person doesn’t repay the loan. Can you afford to make the payments?

4. It’s not easy to remove yourself after cosigning a loan.

There’s no single process for removing yourself as a co-signer. If the borrower can qualify on their own, you might be able to refinance the loan.

5. Your relationship with the borrower.

Are you prepared for a possible rift in the relationship if you end up stuck with the loan? Co-signing for a child is a different situation, but if the borrower is a friend, your favor could turn into a relationship disaster.

How Can You Protect Yourself?

Ask for access to the online loan account so that you can track payments. As soon as you notice a late payment, talk to the borrower. Find out what’s happening. Do they need help? Do they need you to make the payment for a few months until things improve? Remember, your credit is also on the line.


Co-signing a loan can result in a positive outcome. You and the borrower could grow closer together. If it’s your child, you’ll have pleasure from knowing you’re helping them go to college or buy their first car. At the same time, you need to be prepared for things to go wrong.

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