The dangers of co-signed loans are plentiful for those signing on as the well-established borrower with good credit. However, co-signed loans can get just as sticky for primary borrowers down the line.

With so many risks involved with co-signing for both parties involved, borrowers should fully understand the repercussions of having someone co-sign their loans. The benefits might seem straightforward and ideal for the short term, but long-term financial goals can be negatively impacted by co-signed loans.

Building Credit With Co-Signed Loans

Before delving into why some lenders reject good credit built through co-signing, it's important to understand why anyone would choose this option in the first place.

Despite the tense balancing act that springs from co-singing, building credit with co-signed loans can be of immense help for borrowers who, under typical circumstances, would not qualify for a loan. Borrowers who benefit from soliciting a co-signer include:

  • Individuals with little or no credit (e.g. young adults)
  • Those with a poor credit history and credit score, hoping to rebuild their credit
  • Borrowers with high debt-to-income (DTI) ratios (e.g. too many credit cards with high balances)
  • Primary borrowers who are looking to make a purchase beyond their qualified loan amounts (e.g. more expensive home)

For these individuals, lenders might require that another person act as the co-signer, or guarantor, of the loan. In essence, the guarantor is guaranteeing that the primary borrower can and will keep in good standing with the lender by making timely repayments throughout the life of the loan.

If borrowers fail to fulfill the required payments for whatever reason -- unexpected unemployment, medical emergency expenses, divorce, etc. -- co-signers are held liable for the remaining debt owed.

Trouble arises, however, for borrowers who have only taken on co-signed credit and never financed anything on their own.

Dangers of Co-Signed Loans

Earning a great credit score over time through co-signing gives borrowers the confidence to take a financial leap by applying for a mortgage or auto loan individually. But tread this credit-building method carefully as it can have a negative impact on loan application results.

Getting short-changed with a high interest rate, or worse -- not getting approved for the loan completely -- is just one of the dangers of co-signed loans.

Lenders can remain hesitant to offer a new line of credit to consumers with a shallow credit history, like having a co-signed auto loan completed for a first car. A single auto loan backed by a co-signer does not give lenders the insight needed to deem the primary borrower trustworthy enough for new credit.

The possibility of having a loan rejected or receiving an unfavorable credit score should not deter consumers from improving their credit, however. There are viable loan alternatives that can put lenders' worries at ease and keep borrowers from relying on a co-signer's credit and good faith to obtain a loan.

Good Loans for Bad Credit

Those who suffer a poor credit score rating and were hoping to use a co-signed loan to rebuild their credit scores can still turn to other methods of borrowing to achieve a similar result.

A type of loan, called a secured loan, is an example of good loans for bad credit holders. Secured loans compromise with bad credit score holders by allowing borrowers to put forth an asset as collateral for a loan.

Collateral can include a big ticket item like a home or a car. Should a borrower be unable to repay the secured loan, the lender can legally take possession of the asset's collateral value to recoup the loss of the loan.

The collateral aspect of this loan type makes getting approved for a loan easier for those with a tarnished credit history. Moreover, borrowers can avoid the stigma of co-signed loans hovering over their credit reports.

When considering taking on a co-signed loan, giving long-term goals equal importance as short-term goals can help borrowers decipher whether co-signed loans are the best option for all parties involved.

Related Articles
  1. Savings

    These 10 Habits Will Help You Reach Financial Freedom

    Learn 10 key habits for achieving financial freedom, including smart budgeting, staying abreast of new tax deductions and the importance of proper maintenance.
  2. Credit & Loans

    Have Bad Credit? 6 Ways to a Personal Loan Anyway

    It'll cost you more, but borrowing is definitely doable. Here's how to proceed.
  3. Investing

    How to Raise Your Credit Score Quickly

    Here are the best tips for raising your credit score quickly.
  4. Credit & Loans

    How Credit Card Delinquency Works

    When you pay less than the minimum monthly payment on your credit cards, you become delinquent.
  5. Credit & Loans

    5 Bad Moves That Will Torpedo Your Credit Score

    Your credit score can change if you aren't careful. From missing payments to carrying high balances, there are many ways to torpedo your credit score.
  6. Credit & Loans

    5 Common Misconceptions About Your Credit Report

    Your credit report is one of the most important factors in determining your ability to get loans and new credit and has a major influence on your rates.
  7. Savings

    The 5 Dumbest Financial Moves You Can Make

    Learn how these dumb financial mistakes can ruin your long-term financial future, and how making wise financial decisions in the present pays off in the future.
  8. Home & Auto

    The Smartest Way to Tap Your Home Equity

    Using your home as a source of funds can be a smart choice in some situations. Just be sure to carefully run the numbers.
  9. Personal Finance

    What Happens To Your Student Debt If You Die?

    What happens to student debt when you die? It all depends on the lending agency.
  10. Credit & Loans

    How ‘Real’ Is Your Free Score From Credit Karma?

    A free credit score sounds good, but is it worth giving up your personal information to get one online?
  1. Do free credit reports affect your credit score?

    Free credit reports do not impact your credit score. Credit inquiries are divided into two categories: soft inquiries and ... Read Full Answer >>
  2. Does a free credit report show your credit score?

    The free credit reports available from the three credit reporting agencies do not include your credit score. Under the 2 ... Read Full Answer >>
  3. Is getting a free credit report safe?

    Getting a free credit report can be safe if you are careful about the particular website from which you get it. Credit reports ... Read Full Answer >>
  4. How accurate are free credit reports?

    Free credit reports are usually considered mostly accurate, which is why it is important to regularly examine your own reports. ... Read Full Answer >>
  5. Can a Best Buy credit card help you build credit?

    A Best Buy credit card can be used to help improve your credit score and credit history as long as you use the card responsibly. ... Read Full Answer >>
  6. Are personal loans bad for your credit score?

    Taking out a personal loan is not bad for your credit score in and of itself. However, there are several factors that come ... Read Full Answer >>

You May Also Like

Trading Center