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.
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.
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.