Things to know before becoming a loan cosigner

If you are a cosigner or if you are thinking about being one for a loan, there are some things you need to know before you sign the dotted line.

A cosigner may be needed for auto loans, mortgages, credit cards and private (not federal) student loans when a borrower can’t obtain credit on their own, Marissa Van Diest, a financial adviser at Carlson Financial said.

This often happens because of lack of credit history, as in the case of a young borrower, or poor credit history, if someone has been late on payments in the past.

Here's how this will affect the cosigner - it will show up on both the borrower and the cosigner’s credit report. If all payments are made on time, this could help both parties. But if they’re not, the opposite is true and it will hurt both the borrower and cosigners credit.

Also, since the loan appears as an open line of credit for the cosigner, it could potentially make them look more risky to their own borrowers, or make it harder to get a new loan for themselves, Van Diest said.

It's important to note that regardless of whether payments are made on time or not, it will affect the cosigner’s credit report. And then there is the obvious risk of payments not being made on time.

If the borrower is late or misses a payment, that’s an event that will stay on the cosigner's credit report for years. And now, the lender will expect the cosigner to pay the loan, just as if they had borrowed the money themselves. It’s possible they even send it to collections.

It is possible to cosign for someone and then get removed as a cosigner before that loan is paid up, but it’s difficult, Van Diest said.

Many lenders have criteria that must be met to release the cosigner of a loan. Sallie Mae, for example, publishes a list of 10 conditions that must be met, and according to the Consumer Protection Financial Bureau, 90% of requests are denied.

If you know your borrower, their budget and how do they play to make these payments it's not a terrible idea. Make sure you review your own budget to make sure you afford it if they default.

Next, get duplicate copies of everything: loan documents, monthly statements, and login information so you can always check the status of payments and get off the loan as soon as you can, either by having the borrower refinance, or see if the lender offers cosigner release, Van Diest said.