Are Cosigners Responsible for a Personal Loan?

Are you a co-signer on a personal loan or thinking about it? How does that affect you? Co-signing a personal loan or being a co-borrower, could affect your overall credit score and credit utilization ratio. Keep reading to learn the ins and outs of personal loans and how they could affect you.

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What is a Personal Loan?

A personal loan is generally an unsecured debt, like a credit card. However, a personal loan can also be secured to collateral. In one of my prior blog posts, I explained how I used cash to secure a personal loan to help improve my credit. It was one of the smartest financial moves I made to rebuild my credit after foreclosure.

What is a Co-signer on a Personal Loan and How Their Good Credit Scores Can Help You

A cosigner on a personal loan is not the same as a co-borrower. A co-borrower is also borrowing money. Typically, this applies when spouses apply for a bank loan. A cosigner may be a requirement from the lender when the borrower doesn’t have sufficient credit or income to qualify for a loan.

For example, after my foreclosure and years of bad credit, I asked my dad to cosign my truck loan since he had excellent credit. I’m not making this up; the salesperson returned and said the last person who had credit that good was “The Big Show,” the wrestling persona.

As a result of my dad’s good credit score, I received a lower interest rate, which helped me save money.

What Liability Does a Co-signer Have on a Personal Loan?

While cosigner and co-borrower mean different things, the result is the same regarding liability. In this case, a cosigner would be responsible for that debt if the primary borrower defaulted. Also, any lawsuit arising from that default would result in the cosigner being sued. This means that the cosigner’s credit score could also be negatively affected.

Avoid the Pitfalls of Balance Transfers

The additional debt could also mean the cosigner’s credit score decreases if their credit utilization ratio exceeds thirty percent. The credit utilization ratio is determined by how much is owed versus the available credit. Credit utilization ratios are crucial to good credit scores.

With a lowered credit score or too much debt, this could result in the cosigner being denied credit by other lenders.

How the Credit Utilization Ratio Works and its Effect on Credit Scores

Suppose you have a credit card with a maximum line of credit of $10,000. Thirty percent of that is $3,000. Always aim for a thirty percent or less balance on your debt.

Because of the credit utilization ratio, consumers are sometimes confused about why they have low credit scores if they always pay their debts in a timely manner. The credit utilization ratio would be the reason for this.

So, having a thirty percent balance on a credit card or personal loan is better than having a seventy percent balance. Basically, the less you owe, the better.

What Happens if the Primary Borrower Files for Bankruptcy?

Since both parties are responsible for the personal loan, that means if the primary borrower files for bankruptcy, then the cosigner is responsible 100% for that debt.

This could force the cosigner to file for bankruptcy unless the debt is paid back. Failure to act on behalf of the cosigner could result in a creditor seeking action to collect on that debt, whether through wage garnishment, freezing bank accounts, or putting liens on personal or real property.

Therefore, before you agree to be a cosigner on a personal loan, consider all these consequences, including what happens if the primary borrower fails to make payments and defaults on the loan.

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.