Often if someone has no credit or poor credit a bank will request a cosigner before they agree to the loan. A cosigner must have a good credit score .
When a person cosigns for a loan they are telling the bank or financial institute that I’m vouching for this person and if they are unable to pay the loan I’ll pay it. This means they are accepting full financial responsibility for another person in the eyes of a bank. Many people agree to cosign for their friends or family without giving it a second thought. They feel they can trust the people they know without thinking about whether or not they are financially responsible. Regardless of how close their relationship if a person doesn’t believe the other can pay they should never agree to cosign the loan.
The cosigner should consider if they are willing or able to pay for the loan if the other borrower defaults. This very well could happen. The cosigner would then be responsible for paying off the loan or have their own credit suffer because of it.
How being a cosigner effects the persons credit does vary some depending on the bank. Some banks report the loans on just the primary borrowers account. In this case the cosigner will get little to no credit for the loan being repaid on time and correctly. On the other hand if the loan is paid as agreed, and the bank reports on all signers the cosigners credit will improve slightly.
If the borrower defaults on the loan however it is the banks responsibility to contact the cosigner for them to take over payments. There are banks however that do not contact the cosigner at all. In these types of cases the cosigner might not realize the other person has stopped making payments until they are faced with a collection agency and no way to pay it. Any collection that appears on a persons credit report will have a negative impact on their credit score no matter who actually got the loan.
In some cases being a cosigner will have no effect on a persons credit score at all. If a bank doesn’t report on a cosigners credit and the loan is repaid on time they may not notice any difference to their credit score.
Being a cosigner is not something that should be entered into lightly. A cosigner is putting their credit, money, and reputation on the line for someone else. If that person turns out to be unreliable the cosigner is risking their own ability to get a loan in the future. It’s important to remember that even if the person is a good friend if you know they have a tendency of losing track of their finances don’t put yours on the line for them.