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How Co-Signing Can Affect More Than Just Your Credit Score

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When I was 23, I was having a real problem getting approved for a car loan. My income was entry level, my credit score solid but my history limited.  So when the numbers refused to add up, the “advice” I was given by just about every used car salesperson I came across was, “You could always ask your parents to co-sign on a loan for you.”

My response was always a drawn out, “Ehhh…”

Ultimately a local credit union stepped in at the last minute to finance my car. That was days after my Dad had told me he would be “happy” to co-sign on a loan with me, but I was relieved to avoid getting the old man involved since I was really out to prove my financial independence and cut the money cord. Heck, I’d moved across the country; did I still need my Dad’s “blessing” [e.g. guarantee] to buy a car, too?

Co-Signing Stories: The Good and the Bad

Putting a large sum of money between two people can really alter a relationship — both good and bad — depending on the process and the outcome. I’ve heard some instances where co-signing brought two people together, and others where the stress of the loan ultimately strained the relationship.

I posed the question of co-signing to some valued members of a prominent online forum I administrate, and the feedback I got was wide-ranging. One gentleman I talked to, Patrick, was happy to report that his co-signing experience actually built a bond between him and his father-in-law.

“I think it showed a lot of trust in me on his part,” Patrick explained. “He certainly trusts me a lot more because I never missed a payment and did him right.”

Another user I talked to, Marlena, was grateful that her father co-signed on a car for her, pointing out one of the undervalued ways in which a co-signer can help out the friend or family member: building their credit.

“My dad co-signed on a car with me when I was 19. It helped me build my credit and I wouldn’t have been approved for that much without him,” she said. Marlena added that she has since paid off her co-signed loan, and has actually used the co-signing strategy to improve her husband’s credit score by adding him to multiple good-standing credit card accounts in her name.

That said, not every co-signing story I came across was good.

Long-time contributor Heather spoke candidly about co-signing on an auto loan for her mother-in-law.

“It was a terrible experience,” Heather said. “She always paid the loan one day before it was 30 days late.” Heather added the experience “strained” the relationship between her and her mother-in-law, despite the fact that she never had a 30-day late on her credit because of the loan.

“I would never do it again,” she said matter-of-factly.

Things to Consider When Co-Signing

To put it bluntly, co-signing essentially puts your credit score in the hands of someone else. This can have either a positive or negative effect on your score. In one regard, each on-time payment made on the loan gives your credit profile and credit history a boost. On the flip side, if they make a late payment, you make a late payment in the eyes of lenders.

So here’s what you need to consider and be sure of before signing off as a co-signer:

Is your relationship rock solid?

Since paying off a loan is a multi-year commitment, it’s important to be confident that the relationship between you and the friend or family member you’re co-signing with will stand the test of time. If there’s any doubt in your mind, it’s probably not worth the risk to your credit.

How healthy is this person’s financial well-being?

You’re obviously not going to co-sign on a loan with someone whose spending practices you know to be erratic. But if you’re unaware of the purchasing practices of the person you’re considering co-signing with, be frank with them. Ask them what their current financial situation is, and don’t hold back.

It’s not rude to poke for information when it directly affects you and your well being. Consider asking about income, monthly bills like rent and utilities, and determine if the numbers are really going to add up. The bank’s going to do the same thing when weighing the risks of lending — why wouldn’t you do the same to get a better idea of their financial landscape before you pick up the pen to sign?

Successful or not, is co-signing worth it?

Ultimately, co-signing on a loan with a friend or family member is going to bring you that much closer, for better or worse. No matter how much you trust this person’s judgment, teaming up for a big financial decision can put a strain on a relationship throughout the process, especially during tough times. And yet as some of the consumers above have noted, co-signing gave them more confidence in the relationships they had with loved ones.

It’s up to you to determine whether, successful or not, the risks of co-signing are worth taking.

Image: iStockphoto

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  • Linda

    I’m 25, and my mom just co-signed on a car loan with me. I needed another car desperately, am in a good enough financial situation to make my payments but couldn’t get approved because of past things, and my mom asked if I wanted her to cosign. I was very, very hesitant to do it, and although I love my car a lot and nothing has gone awry yet, I don’t know that I would do it again. These big financial decisions can be very stressful when someone is riding your back.

    I know why she’s doing it — I made some mistakes with my credit when I was younger — but these old debts will be falling off next year, plus I am much more responsible and am in a much, much better financial situation (my income has more than tripled) now than I was then. So, I get very frustrated when I hear..”Are you going to have enough to pay your car payment this month? We can’t let this payment get 30 days behind, you hear?” When it was just due today and I already paid it last week, ya know? Ugh…the stress. Probably wouldn’t do it again. But I do love my new ride, and it’s helping my credit score, so ehhh…I don’t know.

    • dfelsted

      When you co-signed with your mom did you get an interest rate based on her credit score?

      • http://jwshapiro.com Joe W. Shapiro

        the loan offer was based on her mom’s credit score, the interest rate is going to be a hybrid of their two scores.

    • http://jwshapiro.com Joe W. Shapiro

      just think of it this way, assuming you could go back in time & not accept her (generous) offer to co-sign then you wouldn’t have been able to buy the car… so really it’s not that bad that your mom offered to do something most parents wouldn’t even consider doing if their child begged them with tears in their eyes!
      When you say you needed a separate car desperately I’m assuming you totalled the first one & didn’t have comprehensive insurance?

      • Linda

        It’s a long story, but mom was the one who trashed my credit in the first place when I was 18 lmao. Then, after my credit was already screwed, I didn’t really worry about it anymore, which was my immaturity and irresponsibility. Mom wasn’t an angel in this, though.

        Anyway, no…I’ve owned 6 cars that I paid for with cash (so many because they were all pieces of shit!), and I needed another car because my last one’s engine blew up (1990 Mazda Miata). The radiator hose started leaking and I pulled over as soon as I could (had to get off the bridge), but it was over with.

        Anyway, as I now make a good income and want to fix my credit, I decided I wanted something newer, and my mom wanted to help me. Probably out of guilt because she screwed my credit in the first place, but hers was fixed before mine.

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