NEW YORK (MainStreet) Financial experts have longed warned against cosigning on auto loans, credit cards and student loans, given the plethora of financial risks.
Though for apartment leases, acting as a cosigner presents different risks.
Newly minted college graduates making the move to a major city will likely need a cosigner on an apartment lease. Landlords typically require tenants to earn at least 40 times the monthly rent, a hefty threshold for young people, in order to be exempt from the guarantor requirement.
Cosigning on an apartment lease can have indirect impacts on your credit history.
As a cosigner, you are liable for rent payments should the primary tenant fail to pay.
"If the cosigner can't pick up the slack and make rent payments, the management company can hire a collection agency to collect the unpaid balance and this will show up on the primary tenant's credit report and the cosigner's," says John Ulzheimer, president of consumer education at CreditSesame. "This is where the problem begins."
Plus, a payment default will remain on your credit report for seven years, which will impact your credit score, a gauge of how well you manage money.
"The credit scoring models don't care about the back story," Ulzheimer warns. "A default is a default whether it was because of the primary tenant or the cosigner."
Even if the primary tenant pays the rent on time, acting as a cosigner could make you less attractive to lenders, particularly if you're looking to apply for a mortgage.
When acting as a cosigner, your credit report will be checked by the landlord, which will be considered as an inquiry on your report. While inquiries generally cause the credit score to drop, the damage is negligible.
Acting as a guarantor won't appear on your credit report itself, but the inquiry from the landlord will appear on the report. "A prospective lender will ask for an explanation and how much the rent is," Ulzheimer says. "If your financial situation was a close call to begin with, the cosigner liability could cause the lender to ask you to put more money down or charge you a higher interest rate."
Ulzheimer says the inquiry risk is lower if you're applying for auto loans, as these loans tend to be smaller than mortgages.
Aside from being on the hook for rent payments, as a cosigner, you'll also be responsible for any damage the tenant and potential roommates may cause to the apartment.
"It's not uncommon for tenants to owe a balance for alleged damage," says Gerri Detweiler, director of consumer education at Credit.com. "The landlord can hire a collection agency to seek money for damages, which would impact the cosigner's credit, too."
Detweiler also warns cosigners to make sure the primary tenant doesn't exit the lease early, without having permission in writing from the landlord. "Unless your lease is modified, the tenant and cosigner will still be responsible for the remaining rent until the lease's official expiration," she says.
While cosigning on an apartment lease isn't as risky as cosigning on a loan, from a credit perspective, cosigning still poses plenty of risks to your financial situation.
"When cosigning, you need to be prepared in the back of your mind to step in and make the payments," Ulzheimer says. "Cosigning means you obliged."
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE.