Say No to Co-Signing

Co-signing a loan or lease is serious business. Before you pick up a pen, be sure you understand how it will affect you. There are repercussions even when the borrower upholds their obligations. Co-signing can drag down a good credit score and your ability to borrow money, even if the loan or lease is always paid on time.

How will co-signing affect my credit?

The loan or lease you've co-signed can show up on your credit report, just like any other debt you have. "Whatever the lender reports each month about the status of that account will be reported for each individual whose name is associated with the account," says Maxine Sweet of credit bureau Experian.

As a result, the loan or lease you've co-signed can increase the size of your outstanding debt. When lenders decide whether to let you borrow more money, they will add the new, co-signed debt to all of your existing debt, such as your mortgage, credit-card balances, car loan or student loans. As a result, you might have a tough time taking out new loans if the lender decides that your debt-to-income ratio or balance-to-credit limit is too high — even if the payment history is perfect.

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What happens if the borrower makes a late payment or defaults?

Any late payments can show up on your credit report, too, sometimes without warning. Some lenders may notify co-signers and allow them to pay before reporting it as late, but generally, they aren't required to give any notice. And if the borrower defaults on the loan, it can destroy your credit — showing up as a default for you, too.

Because so much is at stake, it's usually a good idea to say no if asked to be a co-signer. And even if you'd like to help, first step back and assess the risk — even if it's your child or a close family member who is asking. "Think like a lender," recommends Pamela Rooney, a senior vice president at Wells Fargo. "Think about whether that person has the wherewithal to repay it. From a consumer perspective, it's your money as well as your credit history on the line."

What to do if you decide to co-sign

Before you co-sign, make sure you have answered the following questions. 

• Do I understand the terms of the loan/lease and the notification rules?
• Am I getting the same documents as the person for whom I am co-signing?
• Have I required the borrower to provide proof of payment each month? Or have I asked for access to the online account information so I can check the balance and payment status myself?
• Does the lender have my most recent contact information?

Then monitor your credit report by getting free copies from the three credit bureaus: Equifax, Experian and TransUnion. 

How to get off the loan or lease

Once you become a co-signer, you are usually stuck on the loan or lease as long as it exists. 

The best workaround is to refinance. As soon as the borrower's credit improves, have the borrower apply to refinance the loan, get a new lease or get a new credit card on his or her own — and close out the old loan, lease or card.