Cosigning a loan for a loved one: what are the impacts and consequences for your credit file?

Does cosigning a loan for a loved one affect your credit file?

Yes, cosigning (acting as a guarantor) for a loan can impact your borrowing capacity and potentially affect your credit file. When you guarantee someone else’s debt, you share responsibility for that debt. This is an act of pure generosity: you give without expecting anything in return. This article will help you understand why a guarantor is required, what to consider before making this decision, and the potential impacts on your credit file if you guarantee or cosign for someone else.

Why does someone need a guarantor or co-borrower?

Keep in mind that if a financial institution requires a guarantor, it is because they have concerns about the borrower’s ability to repay. If the financial institution, an objective expert in such matters, has doubts about the borrower’s financial capacity criteria for obtaining a loan, perhaps you should too.

What precautions should you take before deciding to guarantee or cosign for someone?

If someone close to you asks you to guarantee or cosign their loan, don’t just take into account their good intentions. Consider the stability of their employment and any factors that might create financial difficulties (e.g., separation, maternity leave, relocation, job loss, reduced working hours, etc.). These events can negatively affect their finances and repayment capacity.

Before making the decision to guarantee a loved one’s debt, we recommend consulting our 10 tips for guiding your decision to financially assist someone.

What are the impacts and consequences of cosigning for a loved one?

As mentioned earlier, cosigning a loan is an act of generosity, but it doesn’t end there. Unfortunately, most people are unaware of the potential consequences. The debt experts at Jean Fortin & Associés highlight the main consequences of cosigning:

1. The debt is recorded on your credit file
   The financial institution will add the cosigned debt to your list of liabilities, even if the borrower makes regular payments. This could negatively impact your credit file. Moreover, if the person you cosigned for misses payments or makes late payments, it can harm your credit score.
2. Reduced borrowing capacity
   By guaranteeing someone else’s debt, you reduce your own borrowing capacity since the financial institution treats the debt as if it were yours. This additional debt could affect your ability to repay future loans.
3. Increased debt-to-income ratio
   The cosigned amount is factored into your debt-to-income ratio, which could make it harder for you to obtain new credit for yourself.

We recommend learning more about your credit rating, the factors that determine your credit score, and the risks of a high debt-to-income ratio.

What if the person I guaranteed or cosigned the loan for stops paying?

Remember that non-payment of a debt is more often due to lack of capacity rather than lack of good faith. In most cases, it is not that the person does not want to pay, but that they cannot.

If the person stops making payments, you will be responsible for covering all payments on their behalf. Otherwise, a R-9 rating will be assigned to this debt on your credit file.

Ask yourself: What would be the financial impact on me if the cosigned debt is not repaid? If you can absorb the repayment without significant difficulty, your decision might be justified. If, on the other hand, you are likely to face serious financial challenges, you should carefully consider this before agreeing.

Always have a frank discussion with your loved one to avoid making an emotional decision. Too often, we have seen people dragged into the financial difficulties of the person they cosigned for. In these unfortunate situations, both parties end up in financial hardship. Be very careful and think like a banker before signing.

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee