What You Should Know Before Cosigning a Loan

It’s not something that should be taken lightly.

It was a month before my freshman year of college was set to begin, and I was stuck. Neither my parents nor I were able to pay the tuition that we owed even after financial aid and federal loans were applied to my balance. My self-employed parents didn’t have the credit history or the income to cosign the private loan I needed, and as a stubborn 18-year old, I (foolishly) refused to consider attending a more affordable school.

I decided to ask a family member to cosign a private loan. She agreed without much fuss, and I packed my bags for school, appreciative but not fully understanding the financial obligations my cosigner and I had just taken on.

The next year I was in the same situation, needing a private loan to cover tuition. I asked another family member. This time, my loved one said yes, but made sure that I understood the weight of the responsibility we were both taking on.

“If you mess this up, it will affect both of our finances for a very long time,” she cautioned. “And I wouldn’t be able to provide this help for your siblings or my kids in the future.”

For the first time, I understood exactly what cosigning entailed.

In 2011, 90 percent of private student loans had a cosigner, according to the Consumer Finance Protection Bureau. This time of year, many students are scrambling to cover tuition and facing the fact that they may need a private loan and a cosigner. But if you take on someone else’s student debt, here is what you need to know about cosigning.

You’re Responsible for That Debt

As a cosigner, you are fully responsible for the debt if the borrower doesn’t pay, according to the Consumer Finance Protection Bureau.

“A cosigner is contractually liable for the debt — as liable for the debt as the borrower,” says Mary Jane Corzel, senior vice president at Bryn Mawr Trust, a banking and lending company in Bryn Mawr, Pa.

Although most people know this, it’s still important to reiterate. If the borrower misses or is late on a payment, the cosigner is expected to make it. If the borrower defaults, the cosigner is responsible for the whole amount of the debt.

Many Cosigners End up Making Payments

If you’re being asked to cosign a loan, chances are you’re fairly close to the borrower. However, it’s important not to let your personal relationship cloud your decision.

“Most people believe the person they’re backing will pay the loan,” Corzel says.

Unfortunately, research shows this isn’t always true. One poll found that 38 percent of cosigners reported making payments on the loan that they cosigned. Although the sample size was relatively small (about 2,000 borrowers), the trend is alarming, especially since 28 percent of cosigners said that the loan negatively impacted their credit.

Sadly, more than a quarter of cosigners said that sharing the financial burden of the cosigned loan damaged their relationship with the person that they cosigned for.

It May Affect Your Credit

If the borrower that you cosign for makes payments on time, that will have a positive impact on your credit score. On the other hand, if the borrower is late, your credit report will reflect that, too.

When potential lenders pull your credit, they will see that you are a cosigner on a loan. Although many recognize you’re not the main borrower, the loan might still factor into your debt-to-income ratio and how you’re rated as a borrower. This may affect whether or not a lender will grant you a loan.

“If you’ve cosigned a student loan or two, that starts to impact what’s available to you as borrower,” Corzel says.

You May Not Have the Most up-to-Date Info

Too often, most co-signers don’t realize that the borrower has fallen behind on payments until after their credit score’s been damaged.

“Many times you may not know a loan is delinquent,” Corzel warns. “By the time you know the loan is in default, [it’s] impacting your credit.”

If you do cosign, it’s important to have an open line of communication with the borrower so that you can help out before a payment is missed.

“It’s much better if you can get ahead [of it],” Corzel says. “Trouble snowballs once you’re behind 30 or 60 days.”

Cosigning a loan is something that should not be done lightly. It’s temping to help a loved one who needs it. However, bear in mind that the consequences of cosigning a loan could haunt you for decades.