Here's What Happens if You Cosign for a Personal Loan

If someone you care about is trying to take out a personal loan but cannot qualify on their own, they may ask you to cosign for them. This would mean you'd need to provide financial details and help them fill out an application. But what exactly are the implications of this for you, both in the short term and the long term?

You shouldn't take action and agree to cosign until you understand exactly what occurs when you make this commitment. Here's what happens if you cosign for someone else's personal loan.

The lender will check your credit and income

If you cosign for a personal loan, you agree to vouch for the primary borrower. Basically, you put your credit and income on the line. The creditor will consider your financial credentials to determine if you're a qualified cosigner and to make a choice about whether to approve the loan.

Since the lender is going to evaluate you as if you were personally borrowing, you should be prepared to provide information about your income and assets. You will also likely undergo a credit check, which means an inquiry will be placed on your credit record and stay there for two years.

Inquiries impact your credit score, accounting for 10% of your score. Too many inquiries can lower your score because it looks as if you're borrowing too much. So even before you've formally cosigned for the loan, your credit could be affected by your choice. And if you try to borrow in the next two years, you could be asked to explain that inquiry.

The personal loan will show up on your credit report

If the lender approves the loan and you move forward with cosigning, the loan is going to show on your credit record as a debt that you owe. There won't be any special notation or anything on your credit record that you're just a cosigner -- it's going to look to anyone who checks your credit like you took on the debt.

And that's because you essentially did. Although you may have an understanding that the primary borrower will be responsible for repayment, the lender will still report the account on your record, including the balance due, any late payments made, and if the debt goes into default.

Since this account shows up on your record, lenders will count it when calculating how much you owe if you try to borrow in the future. So, for example, if you wanted to get a mortgage, this could impact the amount you were allowed to borrow for yourself.

If the primary borrower makes any late payments, those will also damage your credit and be counted against you by future lenders and in the credit scoring formula.

You could be held jointly responsible for repaying the entire loan balance

Finally, when you cosign a loan, the lender will hold you responsible for paying it just as much as the primary borrower. If the person who you cosigned for stops paying for any reason -- even if they become disabled or die -- the creditor is usually going to look to you to pay off the balance in full.

As you can see, a lot happens when you agree to cosign. Unless all of the above conditions are OK with you, cosigning is most likely something you should say no to. Otherwise, you could really regret it.