Credit is hard to obtain in these tight economic times, and having a cosigner may be a necessary option for those who have little or poor credit. For the cosigner, however, there exist major credit issues to consider before signing any loan documents.
What is a Cosigner?
A cosigner is an applicant who essentially guarantees the loan. This means that if the primary borrower defaults, the cosigner repays the debt. The Federal Trade Commission notes that, with some lenders, three out of four cosigned loans result in the cosigner repaying the debt, and that lenders may collect defaulted payments from the cosigner before collecting from the primary borrower, although this depends on state law.
How Can Cosigning Effect a Credit Report?
The loan reports on both applicants' credit reports, thereby impacting the cosigner's credit even when the loan remains current. For example, the loan alters the cosigner's debt ratio by adding an additional payment on his credit report. When the account initially opens, it appears as a new line of credit, which can lower a credit score. Even an inquiry from the lender checking the cosigner's credit during the application process can affect her credit rating.
What Considerations Should a Cosigner Take?
The Federal Trade Commission makes an important point for cosigners, stating they are asked to take a risk a lender refuses and essentially assume responsibility for an unqualified individual receiving credit. Of course, there are many situations that may require a cosigner, and cosigning can be a useful credit tool. Nevertheless, considering the real implications and potential risks of cosigning to one's credit may help avoid costly and damaging situations.
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