Financial Education

How Does Cosigning For A Loan Affect Your Finances?


The phone rang, a family member was on the other end. A favor was needed. Her car had broken down, and wasn’t worth fixing. She needed a new car, but was fresh out of college and lacked both the cash to buy a car outright, and the credit to finance one. She asked if we could cosign a car loan for her.  Since I had never cosigned for a loan before, I needed to do some investigation before I agreed.

Responsible for Payment

When you cosign a loan, you are agreeing to be responsible for the payments of the loan. While the primary person on the loan application will likely be making the payments, should they become delinquent, you could be sued as well.

Counts as Debt

Since your name is on the loan, it is considered part of your debt. This could impact your ability to secure financing for other major life purchases that take into account your debt to income ratio, such as a mortgage.

Impacts Credit Report

The loan provider will report late payments or account delinquency to the credit reporting bureaus. As a cosigner, this will go on your credit report as well. This will affect your ability to secure additional financing.

Getting Removed From the Loan

Having your name removed as a cosigner can be very difficult even if the primary person on the loan has been diligently making payments. In many instances the only way to have your status as a cosigner removed from the loan is to have the other party refinance the loan only in their name.

Given the consequences if things go wrong, people cosigning a loan must do the following to protect themselves:

  • Have All Documentation: Ensure you have a copy of all the documentation from the loan including payment amount, loan number, and the financial institution initiating the loan.
  • Communicate : Check in with the person for whom you cosigned. Ensure they are making the payments on time, and that they know if they cannot make the payment you are to be contacted immediately. It would be better to know exactly what is going on and to help ensure the payment is made than to be in the dark and find out later you have a negative mark on your credit report.
  • Check-in With Financial Institution : It’s embarrassing to admit that you cannot meet your financial obligations. If a payment cannot be made, a person may try to handle it themselves and not tell you. If you have all the documentation for the loan, you can check in with the financial institution. You can protect yourself without embarrassing or questioning the person you cosigned for.

Cosigning a loan is an easy way to help a family member or friend in a time of financial need. But before doing so, ensure you know exactly what your role is in the process, what the consequences could be, and take actions to protect yourself financially.

Have you ever cosigned for a loan? Did it work out?

Brought to you courtesy of Brock

Disease Called Debt

About the author

Brock Kernin


    • I’ve never needed one either, Mel…but I have been the cosigner. It was a learning experience to find out that it would count against us when trying to get our own financing – it was more difficult than we thought to get ourselves removed from the loan…but we eventually got it done! Thanks for stopping by!

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