Getting a loan for a major purchase like a car or home can be difficult, especially when you are just starting out financially. If your credit score isn't quite good enough to get the loan you want, finding someone with good credit to co-sign your loan might convince the lender to approve the loan. Late payments on a co-signed loan can have several negative effects on you and your co-signer.
Your late payments can show up negatively on your co-signer's credit report.
The Basics of Co-Signing
When someone co-signs a loan for you, he agrees to pay off the loan in the event that you don't pay. In other words, a co-signed loan has two borrowers: the primary borrower who actually receives the loan and the secondary borrower, or co-signer, who puts his neck on the line for the sake of the primary borrower. Co-signers act as a shield that protects lenders against losing money when primary borrowers default on loans.
Negatively Affected Credit Scores
Late payments on a co-signed debt can hurt your co-signer's credit score. A co-signed loan becomes a part of your credit history as well as the credit history of the co-signer. That means any credit events related to the loan, such as late and missed payments, will appear on your credit report and your co-signer's credit report. You might not be particularly worried about a late payment if you already have poor credit, but negative credit events can cause a lot of damage to a good credit score.
Attempts to Collect Payment
When you fail to make a payment on a co-signed debt, the lender doesn't have to try to collect the debt from you before trying to collect from the co-signer. If you are late on a payment, your lender may try to collect from your co-signer without notifying you. This means that your co-signer could end up paying for part of your loan even if you intend to make a late payment. In addition, late payments can result in fees that the lender may try to collect from the co-signer.
Your Personal Relationship
Failing to pay a co-signed loan on time may damage your personal relationship with your co-signer. For example, if your co-signer worked for years to establish a good credit score and your late payments damage his progress, it could introduce tension or resentment into your relationship. Carefully consider the risks of co-signing before asking anyone to co-sign for you, since it puts your co-signer in a precarious situation that doesn't benefit her in any way.