Parents who help their adult children qualify for loans by co-signing may be putting their own financial health at risk.
Co-signing allows people with limited or no established credit, or those who don’t otherwise qualify, to access auto loans, mortgages, student loans, and other financial products at more competitive rates. But it also makes the co-signer legally responsible for repayment if the primary borrower defaults—and can significantly impact the co-signer’s credit score.
The loan appears on your credit report
A co-signed loan will show up on both the primary borrower’s and the co-signer’s credit reports. Late payments or defaults will appear on both, potentially lowering both parties’ credit scores and affecting their ability to secure future loans or favorable interest rates.
The Federal Trade Commission (FTC) warns that a co-signed obligation may prevent you from obtaining credit even if the primary borrower pays on time and you are never asked to repay. “Lenders will consider the loan you cosigned as your obligation,” according to the FTC.
Secured loans—where property is used as collateral—carry additional risk: you could lose the asset if the loan goes into default.
Late payments can damage your score quickly
Payment history accounts for 35% of your credit score. Even if you pay all your other bills on time, a few late payments on a co-signed loan can hurt your score. The risk extends beyond the co-signer to anyone else who might need to borrow in the future.
Mitigation strategies include setting up a family check-in before each due date to ensure the primary borrower makes on-time payments, or offering financial assistance if the borrower encounters temporary difficulty.
It can make borrowing harder
The debt-to-income ratio lenders use when evaluating loan applications counts co-signed obligations toward your total debt. A co-signed loan adds weight to the debt side of the equation, potentially limiting your ability to qualify for new credit or pushing up the interest rates you’re offered.
You can reduce your debt-to-income ratio by increasing your income or paying down existing loans—but a co-signed obligation may complicate those efforts if it limits your borrowing capacity.
Options to reduce the impact
Co-signer release allows you to be removed from the loan, though not all lenders offer this option and qualifying can be difficult. The primary borrower can also refinance the loan without including you, though they’ll typically need to have established a solid payment history with the original co-signed loan.
If late payments have already occurred, helping the borrower catch up may be in your interest since you remain legally responsible for the obligation.
Both parties should monitor their credit reports regularly through the three major credit bureaus. Reviewing reports allows you to identify issues, track scores, and dispute any errors.