Cosigning Condemn your Credit?
Under the law, people are legally able to enter into biding
contracts on their 18th birthday. But sometimes the coming
of this new privilege doesn’t come with an understanding
of what singing your name means.
A very common line that young people will sign on early into
their credit history is the co-signer section of a loan or
credit agreement. There are many reasons why people co-sign
loans. Many times it is a parent who is helping their kid
start credit. Other times it can be friends or significant
others who are co-signing for an apartment, cell phone plan,
car, or credit card.
By definition and by law, a co-signer is guaranteeing the
loan. While they won’t get the bill each month, they
are promising the lender that they are guaranteeing that the
loan will be repaid. The bank is much less interested in who
is writing the check, and more interested that the check is
being written on time, and often enough. By being a co-signer
on a loan or credit agreement you are taking a risk that the
lender isn’t willing to take, and it is important to
consider that risk.
Young people can often qualify as a cosigner because they
don’t have any bad marks on their credit… yet.
When you agree to be a consigner consider this :
1) Other credit companies will consider that just as if you
were obligated for the full amount of the loan. If you cosign
on a 25,000 car for a friend, credit companies will consider
you to have a $25,000 obligation and might not want
to give you more credit.
2) You are every bit as legally liable for the amount of
the loan as the borrower and can be sued if the loan isn’t
3) In most states, even if the borrower misses one payment,
the lender can begin collection efforts against the cosigner.
Additionally, new laws in several states allow student
loans to be denied to students who are deemed “high
risk”. This classification can come from having a large
loan obligation (including a cosigner role) on your credit.
And no matter how sure the borrower may be able their ability
to fulfill their payment obligations, the Federal Trade Commission
reports that 75% of the time in cases where the borrower defaults
on a loan, the cosigner is ultimately the person who ends
up shelling out the cash to cover it.
Cosigning on a loan can be a very generous and an important
step for people on both sides of the lending and credit process.
For the borrower, it allows them to enjoy credit that they
otherwise would not qualify for. For the co-signer, it allows
him or her to build credit while not actually paying any money
(in a successful loan agreement). And for the lender, it is
a chance to do business with the security of limiting potential
There are certainly ways that potential cosigners can protect
themselves from getting in the hot seat. Not every lender
offers these options, but a cosigner should only sign an obligatory
agreement if they feel completely comfortable that their interests
1) Ask the lender to limit your liability to the principle
amount of the loan. If they do end up having to pursue legal
remedies, you will only be responsible for the original amount
of the loan; not late fees, legal expenses, and other costs.
2) Require that the lender notify you immediately of a late
payment. This offers you the chance to perform your own “collection”
efforts by appealing to the borrower to pay the obligation.
If you don’t know the loan isn’t being paid, the
problem can become out of control very quickly.
3) Get a copy of all documents related to the loan. Know
what you are singing.
A final thing to consider is that if a cosigner wants out
of the obligation, there are sometimes ways that it can happen.
For example; a person cosigns on a car for their boyfriend
or girlfriend and they end up breaking up a year later. There
is a good chance the loan is being paid in good faith and
that the borrower has earned enough credit that the lender
will release you from your obligations. In some states the
borrower must also agree to release you.
Don’t forget your co-signer obligations even if your
Financial decisions, while made easily with a pen stroke,
have lasting implications on a young person’s credit.
Being a co-signer is a serious commitment and should not be
done without careful consideration. There is a lot to know
and the best way to protect yourself is to know and understand
your risk. Ask questions, and require some of your own terms.
Cosigners are like copilots. They fly and crash along with
the pilot. Know what flight you’re getting on, and whose
flying the plane.
If you wish to cosign loans or credit cards be sure and check
out our favorite lending partners.
Ask the Banklady Articles: Fees
and points with home loans | Arm
Loan Tips | What
are the advantages of your best mortgage company? | What
is a Heloc? | Auto Loan Advice