Agreeing to legally co-sign loans for a friend or family member’s loan is a big commitment that can seriously impact your own future ability to get approved for financing and credit. Before deciding to co-sign on any loans, it is critical that you fully understand these potential effects on your finances and creditworthiness.
Your Credit Score Will Be Impacted by Co-Signing Loans
When you officially co-sign for any type of installment loan, mortgage, student loan, auto financing or credit card, the lender will do a hard inquiry into your credit report, which can temporarily lower your credit score by a few points. Too many new credit inquires over a short period makes you appear desperate and higher risk to other lenders.
More Debt Obligations Reflected on Your Credit Report
By co-signing a loan, even if you are not the one using the loan proceeds, that new debt obligation will still show up on your personal credit report and factor into your overall debt-to-income ratio. Taking on someone else’s additional debts through co-signing loans can jeopardize your own borrowing capacity and ability to qualify for future financing.
Higher Credit Utilization Ratios Can Hurt Your Credit Score
If you co-sign for a large installment loan, home equity line of credit, or credit card limit, the additional borrowed balance can negatively push up your credit utilization ratio if the primary borrower uses the full amount extended. Higher credit utilization has a large detrimental impact on your credit score.
Missed or Late Payments Will Damage Your Credit Profile
One of the biggest risks of co-signing loans is that if the primary borrower fails to make payments on time or misses payments altogether, those derogatory marks end up infecting your credit history as well. Just a single late payment can significantly damage your own creditworthiness for years when applying for future loans or credit cards.
You Have Full Legal Liability and Vulnerability to Collections
In a worst case scenario, if the primary borrower completely defaults on the co-signed loan at any point, as the co-signer you immediately become legally liable for repaying the entire remaining loan balance yourself. Destructive collections actions kick in, absolutely decimating your credit score in the process. The blackmark of any defaulted loans you co-signed stay on your credit report ruining your profile for up to 7 years.
Difficulty Qualifying Independently for New Credit Products
Due to the perfect storm of increased debt burdens, lower credit score, higher utilization ratios, and possible derogatory marks – all from co-signing loans – you can easily be left in a situation where you are far less likely to qualify for any new credit cards, auto loans, mortgages, lines of credit, and other financing in your own name. Your options become limited.
Potential Severe Strain on Personal Relationships
In a worst case scenario, if the primary borrower you co-signed for stops making payments and causes the loan to go into default, which then destroys your credit profile too, it will likely create irreparable damage to your friendship, family or personal relationship with them. The financial resentment can be severe.
Co-signing Can Create Tax Complications
If the borrower stops paying and you wind up having to start making loan payments yourself to avoid default, you typically cannot claim any of that interest paid on your personal tax return since the loan is not in your name. And if you pay off the full balance, you also cannot claim a bad debt deduction. So co-signing loans potentially creates frustrating tax complications.
Clearly, co-signing loans is an extremely major commitment that requires consideration of the lasting impacts it can have on your financial life and credit profile for years to come. If you do choose to proceed with co-signing, be sure to create and sign a detailed contract with the borrower that outlines the exact repayment terms, schedule, interest rates, and all other obligations of both co-signer and borrower. This provides protection for all parties involved. Finally, also consider requiring the borrower to put up collateral assets that you can claim if they wind up defaulting.
And if you’ve already made the mistake of co-signing loans in the past and are now dealing with the painful credit score consequences, there are still options to eventually rebuild your profile by connecting with credit repair experts. The analysts at Get Approved Canada have years of experience successfully helping consumers recover after co-signing loans damaged their creditworthiness. Don’t wait – contact us today to regain control of your financial future.