If your friend or a family member asked you to help co-sign a loan, what are the risks involved? Is there any bad effect on your own credit score?
Generally, co-signing a loan means you may end up having to pay for the borrower and getting your credit score damaged! When you co-sign a loan, it will appear on your credit report even though you are not the one using the money. This is to show other lenders your total debt obligation, so your overall available credit will be reduced – meaning if you can previously borrow a maximum of $5,000, maybe you can only take an online loan up to $2,000 etc.
Since you are serving as the backup payer in case the borrower stop making payments, the lenders have to consider such worst case scenarios, which happens more often than you imagine. Many parents co-sign their child’s student loans and have to pay back on their behalf as they could not find a job after graduation.
If you are planning a major financing for a home or car, it is better to avoid co-signing a loan for others. Generally, I will only co-sign a loan for a close friend or family and the amount is what I am able to afford. If you are trying to maintain a good FICO score, being a loan co-signer has too much risks. The borrower only has to make a late payment or default on payments to ruin all your previous efforts to improve your credit. I rather be a bad guy and stop them. Accredited non-bank loan lenders do run a credit check so that you do not have to put down any collateral. The drawback is of course higher interest fees and smaller loan amount.