To Cosign or Not to Cosign: It’s a Big Question

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When I got the itch to buy my first new car, I asked my dad if he would cosign with me. He responded with a lecture and a threat. The lecture started with, “If I do this, you better make the payments on time” and “If you think you are going to be one day late, I want to know about it.” He went on to explain that if I missed a payment it would impact his credit report, not just mine. He also was clear that if he had to make a payment, the car would be his for that month. At the time, this sounded harsh, but in retrospect, it was actually good advice.

Cosigning a loan is a big responsibility.

When being asked to cosign or when you are asking someone to cosign on a loan, it’s important to know how this question may impact each of the parties to the transaction. Financial goals of both will be at stake.

Questions to Consider When Thinking About Cosigning

  • Are you able to make the payment each month for the entire duration of the loan if the person you are cosigning for isn’t able to meet the monthly payment?
  • Are you planning to apply for a loan in the future? Cosigning on a loan may create the appearance that you are overextended because you would be equally responsible for the monthly payments for both loans.
  • Can you trust the person that you are cosigning with to let you know if they are experiencing financial difficulties before falling behind with the monthly payments?

A cosigner is equally responsible for making sure the payments are made as outlined in the loan agreement. If payments are missed, both parties may have these missed payments reported to credit agencies once the missed payment is more than 30 days past due. As a cosigner, you should be notified before late payments are added to your credit report as long as the lender has your current contact information, so if you change your address or phone number, it’s important to update this information with the lender so you can stay involved with the loan. If you have cosigned on a line of credit, know the other cosigner could exceed the credit limit without you being notified, which can adversely impact your credit.

I remember how excited I was after deciding to buy a new car. I had a full-time job, and a few of my friends and coworkers were buying new cars. I found the car I wanted, but then was told I needed a cosigner.

In high school, I had bought my first car with money that I had saved, and I borrowed the rest from my parents. Although I had paid every penny back that I had borrowed from them in a timely manner, it hadn’t built or established the credit I needed later to buy the car I wanted. None of the timely payments had influenced my credit report, so I was back to asking for help with this new purchase.

My father’s lecture might have been a little over the top, but I understood what was involved for the cosigner. When he agreed to cosign, I recognized the responsibilities of my payments in a new light and was able to establish the credit I would need for my future lending needs.

As a cosigner, it’s important to understand the potential impact a default on the loan would have on your own credit and to stay involved with the loan and payment history until the loan has been paid in full to assure your credit isn’t impacted negatively. It’s also important to maintain your relationship with the other cosigner and to keep lines of communication open if their financial situation changes. Remember: your credit is also on the line.

For the person asking for a cosigner, this process is a great way to establish or rebuild your credit, but keep in mind what’s involved for both of you.

My dad made sure I understood the responsibility of cosigning. Thanks to that single conversation, it’s a lesson I’ll never forget.

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