Are you familiar with this scenario? Your son or daughter wants a car and has the income to pay for it. They are young and because of this, they may not have any credit or very little credit. They want you to cosign for the loan. So how does this happen and what are the ramifications for you?

How do you think of this loan?

You have to think of it as your loan in that it goes on your credit report. But, you will have little to no control. What if they start missing payments or are late with payments? Will that affect your credit and your score? Yes it will, as it will appear on your report. How about if it goes into default and it’s repossessed?

Will that affect your credit report and FICO credit score?

Yes it will

The other part of the problem is that if the creditor cannot get the money back that is owed after the sale of the car at an auction, they will attempt to obtain the deficiency from the original party –the person who is the primary account holder. In this case it is your son or daughter. If they cannot get the deficiency from them, they will come to you, the cosigner. You now must make up the difference.

Once the deficiency is paid, it still remains a derogatory item on your credit report.

If you cosign on a credit card for them, it affects your score differently, because it is a revolving debt and revolving debt is scored based on the payment history and the Amount Owed and Maximum Amount Allowed, known as your credit ratio. If you’re ratio is high as they have borrowed a lot, meaning their credit card is almost maxed out, it will negatively affect your score. It could be up to 100 points.

Who Can Cosign For A Loan

Anyone with good credit can cosign for a loan. It could be business associates, family members, spouses, or friends. Please remember that friendships and relationships can be destroyed if the borrower defaults on the loan.

You must weigh the risks of cosigning for a loan. Before you sign as a cosigner, you should review your own credit and fully comprehend how adding this additional debt could impact your credit.