When you agree to cosign or cosign a loan from a friend or family member, you are putting your own finances and ability to obtain credit at risk. Here’s what you need to know before you cosign for a loan.
What is a cosigner, cosigner, cosigner, or joint signer?
A cosigner, or any of its synonyms, is a person who agrees to be responsible for someone else’s debt. If you co-sign someone else’s loan and that person defaults or defaults, you will have to repay the loan.
An individual who is unable to obtain a loan on their own may be able to obtain a loan if they have a co-signer to guarantee their debt. These individuals may not qualify for a loan on their own because they are too young to have a credit history, or because they have poor credit or do not have a fixed income. When you agree to co-sign a loan, you are taking a risk with someone the lender (or creditor or creditor) believes is not a good credit risk.
To become a cosigner, you must first sign the loan documents stating the terms of the loan. The lender must also give you a document called a Notice to Cosigner. The Notice states what will happen if the primary borrower does not pay on time or defaults on the debt. Pursuant to the FTC ‘s Credit Practices Rule , the Notice reads as follows:
Notice to cosigner
You are being asked to guarantee this debt. Think it over before you sign. If the borrower defaults on the debt, you will have to pay it. Make sure you will be able to pay if you have to, and consider whether you really want to accept this responsibility.
If the borrower defaults, you may have to pay the full amount of the debt. You may also have to pay late fees or charges incurred in debt collection efforts, all of which increase the amount due.
The creditor can collect the debt from you without first trying to collect it from the borrower. The creditor can use the same collection methods against you that they would use against the borrower, for example suing you, garnishing your wages, etc. If this debt is ever found to be delinquent, that fact could become part of your own credit report.
This notice is a notification and does not act as a contract that makes you responsible for the payment of the debt.
In some states, creditors must first try to collect from the primary borrower before trying to collect from the cosigner. If applicable law in your state prohibits the creditor from charging the cosigner without first trying to collect from the primary debtor, then credit grantors may remove or omit this phrase from the notice.
The notice must be in the same language as the loan agreement. For example, if the loan agreement or contract is written in Spanish, the Notice to Cosigner must also be in Spanish.
A friend or family member can ask you to cosign almost any type of loan. The most common are student loans, motor vehicle loans, home improvement loans, personal loans, and credit card agreements. Mortgage loans too. However, if you cosign some types of mortgage loans, you may not receive a notice. This is because federal law does not require notice to be served for the purchase of real estate. But it’s still important that you carefully consider the risks of co-signing the loan.
If I act as cosigner of a loan, will I obtain some type of property right on the asset financed by the loan?
When you co-sign a loan, you agree to guarantee someone else’s debt. But you do not receive any title, nor do you acquire ownership or other rights with respect to the property that is being paid for with that loan. You are the only one who will have to repay the debt if the primary borrower falls behind on payments or goes into default.
Can being a co-signer on a loan hurt my credit score ?
Yes. Once you take responsibility for the debt, the debt is yours. You are not the guarantor of someone else’s loan. It becomes your loan and can be reported to credit reporting companies as your debt. If the primary borrower pays late or goes into default, that negative credit history may show up on your credit report .
You can ask the lender to include an option in the loan agreement that releases you from liability. But even then, don’t count on the possibility of being released from your obligation. The lender and primary borrower have to agree to take it out of the loan agreement, and that’s not likely to happen. At the end of the day, the lender is only making the loan because you agreed to take responsibility. If the lender released him from this responsibility, it would mean that he has to assume a greater risk.
- Even if the main borrower pays on time and you are not asked to repay the debt, the responsibility you assumed for that loan may limit your ability to get other credit. Credit grantors will consider the amount of the loan that you co-signed as one of your credit obligations.
- Before pledging property to secure the loan, such as your car, furniture, or jewelry, make sure you understand the consequences. If the borrower doesn’t pay, you could lose your assets.
- Lenders generally prefer a cosigner with a high credit score, a clean credit report, and a long history of consistent, on-time payments. If you meet those criteria, are you willing to put everything at risk by co-signing someone else’s loan?
- Ask your family member or friend to prepare a budget and show you how they will repay the loan. Make sure that both you and the primary borrower are able to afford the monthly loan payments. If the borrower loses his job or his financial situation changes, are you able to afford the loan payment?
- Ask the lender to estimate the amount of money you might have to pay back if the borrower doesn’t. The lender is not required to do this, but may do so if you ask.
- Ask the lender to send you monthly loan statements, or agree in writing to notify you if the borrower misses a payment or changes in the terms of the loan. If the lender agrees to send you statements, you will be able to find out if the borrower defaults on payments. If the lender is unwilling to send you statements but agrees to notify you in the event of a default, you can gain time to deal with the problem and protect your credit. In both situations, you may be able to make up late payments without having to repay the full amount right away.
- Communicate with the borrower regularly. Insist that the borrower keep you regularly updated on the loan and any anticipated payment problems.
- If you’re co-signing for a purchase, get copies of all important papers. This documentation includes the loan agreement, the informative document established by the Truth in Loan Transactions Law and the guarantees. If a dispute arises between the borrower and the creditor or loan originator, it may be helpful to have these documents. The lender is not required to give you these papers. You can ask the borrower for copies.
- Check your credit reports regularly. You should review them once a month to detect any unpaid fees or errors. If you see an unpaid installment, contact the primary borrower immediately to try to resolve the issue. If you see an error on your credit report, dispute it with your loan servicer or lender and credit reporting companies .
- Check the applicable laws in your state to see if you have other rights as a co-signer. Contact your state banking regulatory agency or attorney general to find out if your state has other protections for cosigners.