Before agreeing to help a relative by cosigning on a vehicle loan or lease, consider the potential effects on your family's ability to get credit. Cosigning on a vehicle for your brother, for example, can potentially hurt your credit score. This, in turn, can affect your spouse's borrowing power.
No Direct Effect on Spouse
Your spouse's credit score is not directly affected when you cosign on a vehicle with your brother. You and your spouse have entirely separate credit reports. Unless your spouse also cosigns, that account is not listed on your spouse's credit report and will not change her credit score.
Hurts Your Credit
Even if your brother makes every car payment on time, cosigning on the vehicle will hurt your credit, at least at first. When you apply to cosign for your brother, the finance company runs a credit check on you, which hurts your score. In addition, when the deal goes through, the new account hurts your score both in the area of new credit and in your length of credit history by decreasing your overall account age. The new debt liability also adds to the amount you owe, which decreases your credit score.
Significant Damage Potential
Your brother's management of the vehicle payments can significantly damage your credit score further. Whenever your brother has a late payment, this appears on your credit report just as if you had made the late payment. The lender can also pursue you for repayment of the debt if your brother is not paying. If neither of you pay, the lender will repossess the vehicle and you and your brother will both see your credit scores drop significantly.
Indirect Effects on Spouse
When your credit score decreases, this limits the ability that you and your spouse have to receive joint credit. For example, if you want to apply for a mortgage together, the lender will consider both of your credit scores to determine whether you qualify and what interest rate you will pay. Your low credit score could disqualify you or force you to pay a higher interest rate. In addition, cosigning will affect your debt-to-income ratio. Your total debt payments, including your proposed new mortgage, your spouse's debt payments and your debt payments, including your brother's car, cannot exceed 36 percent of your monthly income, in most cases.
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