If you’re a parent, you may decide to co-sign a loan with your adult child to help them qualify or give them access to more competitive interest rates. Co-signing can allow people with no established credit or low credit, or who don't qualify for another reason, to get auto loans, mortgages, student loans and other financial products.
However, co-signing also makes you legally responsible to pay the loan if your child can’t. These loans can also affect your credit score. Here’s what to know.
Must Read
The loan shows up as your debt, too
A co-signed loan will likely also show up on your credit report, not just your adult child’s report. That means late payments or defaults will show up on both of your credit reports, and changes to your credit score as a result can impact your own ability to get future loans and the interest rates you may be offered.
The Federal Trade Commission (FTC) warns that “Your liability for the loan may prevent you from getting credit, even if the main borrower pays on time and you aren’t asked to repay the loan. Lenders will consider the loan you cosigned as your obligation.”
You could also lose your property if you use it to secure the loan.
Where You Can Fix Your Credit Right Now
Missed payments can damage your score quickly
Co-signing a loan isn’t just about putting your trust on the line. Your credit score is also at risk if your co-signer makes late payments. Your payment history dictates 35% of your credit score, and even if you pay all of your bills on time, a few late payments for a co-signed loan can hurt your credit score.
You can mitigate this risk by setting up a family check-in before the due date each month. You can ensure that your child will make on-time payments or offer financial assistance in the event they can’t make on-time loan payments.
It can make borrowing harder
While co-signing can make borrowing harder, it’s important to know why. The calculation boils down to the debt-to-income ratio, which lenders use when deciding if someone can afford new debt.
You can reduce your debt-to-income ratio by increasing your income or paying off loans. A co-signed loan adds more weight to the debt side. That doesn’t necessarily mean you shouldn’t co-sign a loan, but it’s something to consider, especially if you need to borrow money from a lender in the near term.
How to reduce the damage
You can apply for a co-signer release, which would remove you from the loan, but these can be challenging to get and not all lenders offer them. Your child can also refinance the loan and not include you as a co-signer on the new loan, though they will likely need to have built up a good payment history with the co-signed loan to refinance.
If your adult kid has already made late payments, it may make sense to help them catch up, since that loan is legally your responsibility as well.
Both you and your child should also monitor your scores via a free copy of your credit reports through the three major credit bureaus. You can see your score, review each item and dispute any mistakes.
