When you cosign a loan for a friend or family member, you put your finances and creditworthiness on the line. Here’s what you need to know before you cosign a loan.
- What’s a Cosigner?
- Why Would Someone Need Me To Cosign Their Loan?
- What Kind of Loans Can Be Cosigned?
- What Are My Obligations If I Cosign a Loan?
- If I Cosign a Loan, Will I Get Any Ownership In the Property the Loan Finances?
- How Does Cosigning a Loan Affect My Credit?
- What Else Should I Think About Before I Cosign a Loan?
- If I Cosign a loan, What Can I Do To Protect Myself?
- Can I Be Released As the Loan Cosigner?
A cosigner is not the main borrower. When you cosign a loan, you agree to be responsible for someone else’s debt. If the main borrower misses payments, you must make the payments. If the main borrower misses payments or stops making payments (also called defaulting), you must repay the loan.
A person who can’t qualify for a loan on their own might be able to get a loan if they have a cosigner. They might not qualify on their own because they’re too young to have a credit history, have bad credit, or don’t have a steady income.
When you cosign a loan, you take a chance on someone who the lender (also called the creditor) doesn’t think is a good credit risk.
You can cosign just about any type of loan, including student loans, auto loans, home improvement loans, personal loans, credit card agreements, and mortgage loans. No matter what kind of loan it is, carefully consider the obligations and risks of cosigning.
To become a cosigner, you must sign documents that tell you the terms of the loan. Also, by law, the lender must give you a document called the Notice to Cosigner. The Notice tells you what will happen if the main borrower doesn’t pay on time or defaults. Under the FTC’s Credit Practices Rule, this is what the Notice says:
Notice to Cosigner
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.
You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.
This notice is not the contract that makes you liable for debt.
In some states, creditors must try to collect from the main borrower before they collect from the cosigner. If that’s the law in your state, creditors can cross out or remove the sentence in the Notice that says they can collect from you without first trying to collect from the borrower.
You may not get a Notice to Cosigner if you cosign some types of mortgage loans because federal law doesn’t require the Notice for real estate purchases. Even if you don’t get a Notice, it’s important to carefully consider the risks of cosigning.
The Notice to Cosigner should be in the same language as the loan agreement (also called the contract). For example, if the agreement is in Spanish, the Notice to Cosigner should also be in Spanish.
No. Cosigning a loan doesn’t give you any title, ownership, or other rights to the property the loan is paying for. Your only role is to repay the loan if the main borrower falls behind on the payments or defaults.
After you cosign a loan, the debt is your responsibility. You aren’t just the back-up for someone else’s loan. The creditor can report the loan to the credit bureaus as your debt. If the main borrower makes payments late or defaults, that bad credit history might show up on your credit report.
- Your liability for the loan may prevent you from getting credit, even if the main borrower pays on time and you aren’t asked to repay the loan. Lenders will consider the loan you cosigned as your obligation.
- You could lose any property you offer to secure the loan. If you offer to use your car, furniture, or jewelry to secure the loan and the borrower defaults, you could lose your property.
- Your credit will be at risk. The main borrower’s actions can affect your credit score, credit report, and history of on-time payments.
- Before you agree to cosign a loan, ask the main borrower to make a budget and show you how they’ll repay the loan. Make sure the monthly loan payments are affordable for both of you. If the borrower loses their job or has a change in finances, can you afford to pay the loan?
- Ask the lender to tell you the total amount you might owe if the main borrower defaults. The lender doesn’t have to do this, but might, if you ask.
- Ask the lender to send you the monthly loan statements, or to agree in writing to tell you if the main borrower misses a payment or the terms of the loan change. If the lender sends you the loan statements, you’ll see if the borrower misses payments. If the lender agrees to tell you about missed payments, you might be able to deal with the problem before it hurts your credit. In both situations, you might be able to make the overdue payments instead of repaying the entire loan immediately.
- Communicate with the borrower often. Be sure the main borrower gives you regular updates about the loan and any payment problems they expect or are experiencing.
- If you cosign for a purchase, get copies of all important papers. This includes documents like the loan contract, the Truth in Lending Act disclosure statement, and any warranties. You might use them if there’s a dispute between the lender and the borrower. The lender doesn’t have to give you these papers, so you might have to get copies from the borrower.
- Check your credit reports regularly. Check as often as once a month to spot any missed payments or errors. If you see a missed payment, contact the main borrower right away to try to resolve the problem. If you see an error on your credit report, dispute it with both the lender or loan servicer and the credit bureaus.
- Check your state law for other cosigner rights. Contact your state banking agency or attorney general to find out if your state has other cosigner protections.
If you ask, the lender might include an option in the loan agreement to release you as the cosigner. The lender and the main borrower must both agree to remove you from the loan and release you from responsibility to pay. The lender isn’t likely to release you because it would increase the risk for them.