Pros and cons of a spousal cosign on a loan

What is a cosigner?

A cosigner on a loan is an individual who signs paperwork, agreeing to be financially responsible for paying back the debt in case the borrower is unable to do so.

How does cosigning a loan work?

If you are applying for a loan or a credit card, and your individual income and/or credit score is not quite high enough to warrant a bank's or creditor's approval, they may suggest adding a cosigner to your loan agreement. A cosigner may boost your financial credentials with their own and could make you a better qualified candidate for a loan or credit card.

Be aware, however, that a cosigner does not simply vouch for you. He or she will also be on the hook to repay your loan in full in the event that you default. Marital money management is a tricky business, and using your spouse as a cosigner has several pros and cons.

Pros of having your spouse cosign on a loan

You might get a better interest rate

If your spouse has a better credit score than you, you may qualify for a better interest rate and be able to access more generous payment terms than you would if you were able to secure the loan by yourself. The same applies for any cosigner with better credit history and higher annual income than yours.

You likely stand to mutually benefit

Since you're married, it's likely that you both stand to benefit from a new car, credit card, or home loan. Your spouse would have greater incentive to cosign on a loan than another relative or trusted friend would.

Cons of having your spouse cosign on a loan

It will appear on both of your credit scores

A cosigned loan could weigh quite heavily on both your combined credit histories. That means if your payments are late, they adversely affect both of your scores instead of just one, and if you default on the loan altogether, both of your credit scores could be affected. It's important to weigh the mutual benefit of any loan against the threat of doubly bad credit. Bad credit can cause severe, long-term disadvantages to both of your lifestyles and your household budget.

It may limit your spouse from getting future loans

Your spouse may want to reconsider cosigning on your auto loan, for example, if he'd or she'd like to secure an additional auto loan for themselves within the next few years. If you're not a great candidate for a loan now, work on repairing your personal credit now instead of offering up your spouse's credit as collateral.

Debt to income (DTI) ratio is used by lenders to evaluate how much you owe versus how much you earn. It is often used by the lender to determine if they believe you can handle additional debt. DTI is the percentage of your gross monthly income (income before taxes) that is used to pay your current loans including items like rent, mortgage, car payments, credit card or other debt. If you cosign on a loan, that new payment becomes part of your DTI ratio, as though you were the one making the payments each month and could limit you from accessing additional loans.

It could get messy in the event of a divorce

The major hitch of cosigning a loan is that a cosigner is potentially taking full responsibility for the debt, but actually has no legal claim to the assets. That means that if you and your spouse part ways in the future, it has no effect on your cosigned loan agreement, and creditors could still come calling. In fact, if you've been the one with superior credit, they may contact you first if your former spouse defaults. Why? Because the creditor is betting that you'll be the one to pay up first. There are few options for getting out of a loan that you've cosigned, and settling the debt is frequently the simplest one by far.

Some frequently asked questions about cosigning

Here are some additional common questions about cosigning that you may want to consider.

Does cosigning hurt your credit?

While cosigning on a loan does not negatively impact your credit, your credit and the credit of the borrower is impacted if loan payments are not made. This means that if the primary borrower does not make payments on their loan, you will need to pay back the loan in order to keep your credit from being negatively impacted.

Does the cosigner on a loan have to be my spouse if I am married?

Couples should also know that the cosigner on any loan or credit agreement is not legally required to be your spouse. (You can read more about what your creditors can and cannot do on the Federal Trade Commission’s website.) 

If you'd like more money management tips for newlyweds, or helpful info about combining your finances, you can find helpful information in the Protective Learning Center.

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