When we apply for a new line of credit, the creditor asks for a cosigner to act as a guarantor to the loan. Mostly, the creditors need a cosigner with a good credit score to sign the loan agreement if the borrower does not have a good score to qualify for the loan. The Federal law requires the creditor to give a notice to the cosigner to inform him about his obligations towards the debt if he cosigns the loan agreement. Cosigning an agreement means that you are just letting the primary borrower use your credit history and by doing so you’re acting as a guarantor to the loan.
Just like the primary borrower, the cosigner is also fully responsible for the debt. Now if the primary borrower somehow fails to repay the debt on time, either due to loss of job or otherwise, the cosigner will be required to pay back the entire debt to the creditor. Even if the primary borrower dies, the cosigner remains responsible for the debt. Another important thing is that, this loan account will appear on the credit report of both the primary borrower and the cosigner. If the creditor does not get the money back from the primary borrower, he will notify the cosigner and will ask him to make the payment.
Now, since the cosigner credit account appears on your credit report and forms a part of your credit history, your FICO score gets affected if the account becomes delinquent. Moreover, due to non payment of the cosigned account, both your debt to income ratio and the balance to limit ratio will rise and your application for a new line of credit may get rejected.
You should therefore cosign a loan agreement only if you can afford to repay it back. Moreover, before cosigning an agreement, you should first understand the purpose of the loan and go through the terms and conditions to check whether you can afford to abide by the conditions. However, there are certain instances where cosigning the loan agreement becomes necessary. For example, you may need to cosign an education loan for your son or daughter. But even in such cases you should try to limit your obligation towards the loan only to the principle amount, by negotiating with the creditor.