As a cosigner, remember that if the borrower (your friend, family member, significant other) misses payments, your credit score will take a huge hit! If the bank is requiring a cosigner, the bank doesn’t fully trust that the borrower will make the payments. If the borrower misses a payment, the lender can come after you for the money.
Even if the borrower you cosign for makes all his or her payments on time and in full, cosigning a loan can still affect your credit. The total amount of the loan is now considered your debt and factored into your debt-to-earnings ratio (how much you owe compared to how much you earn) when you apply for credit on your own. That means that cosigning a loan can lower your credit score and limit the amount you can borrow.
There are several reasons why people are turned down for credit and seek cosigners:
• No established credit, a big factor for young borrowers
• Past financial problems, like bankruptcy
• Poor credit history
• Not enough income
• Too much current debt
If you want to help a friend or family member, it may be better to point them to a trusted financial advisor.