When an individual cosigns a loan for another individual, they accept responsibility for the loan, lease, or other similar type of contract if the original borrower cannot pay as they promised. Whatever an individual cosigns for will appear on their credit report as if it is theirs, which may influence their credit score, depending on their credit history.
This allows the primary borrower to obtain a loan that they may not have otherwise qualified for based on restrictions, such as bad credit or a non-existing credit history. It also provides the lender with assurance that the loan will be paid.
Cosigning is an important decision that may have benefits. Typically, individuals who voluntarily cosign on a loan are friends or relatives. This does not necessarily mean that the consignor’s finances or relationship with the original borrower will suffer. It is simply something to consider and a decision not to be taken lightly.
Prior to agreeing to assist, the consignor should meet with the primary borrower and discuss the circumstances of the loan as well as the borrower’s plan to meet their financial responsibilities. It is important for a consignor to understand what will be expected of them and to assess the risks and benefits.
What Are Some of the Consequences of Cosigning?
It is important for an individual to be aware that there may be serious consequences to cosigning on a loan. This is because the consignor will assume liability if the borrower cannot make their payments. In certain situations, a consignor may be held liable for the full amount of the loan, including late fees or costs that are associated with collection.
If a consignor is required to pay off an entire loan, this requirement may negatively affect the consignor’s credit report. This may occur because when a borrower cannot make payments, their loan goes into default status with the lender.
In those situations, a lender is legally entitled to obtain monetary payments from the consignor. The lender then may be able to sue the consignor for the existing debt or have the wages of the consignor garnished in order to pay the debt.
Because of this, an individual needs to discuss all of the implications of cosigning with both the lender and the borrower with whom they are cosigning.
There are several risks associated with cosigning a loan, including:
- The consignor will have to pay the debt if the primary borrower does not;
- In some jurisdictions, the creditor may approach the individual first as a cosigner before approaching the borrower;
- An individual may also have to pay late fees or collection costs if they default on the loan;
- The creditor may utilize the same collection procedures as the principal borrower against them; and
- If the primary borrower fails to pay and goes into default, the individual’s credit will suffer.
Cosigning on another individual’s debt may impair their capacity to obtain other loans. The debt is regarded as the consignor’s and will add to their overall outstanding sum.
It is also important to note that cosigning a debt for a child may also reduce an individual’s estate or gift tax exemptions.
How Much Can a Cosigner on a Loan Be Held Liable For?
Before an individual agrees to cosign on a loan, as noted above, it is essential to understand their consignor liabilities. For example, if an individual cosigns on a mortgage loan and the principal borrower does not make payments, the consignor will be liable for the entire loan amount.
Before an individual cosigns, they should ensure that the primary borrower does have the financial means to pay the mortgage, insurance, and maintenance costs for their new home. The consignor should also ensure that they have enough money to fulfill the payments if the homeowner defaults.
If I Cosigned, How Long Will the Primary Borrower’s Debt Exist in My Credit History?
If the information on the consignor’s credit report is accurate, the debt can remain on their credit report for up to seven years. Creditors are required to notify an individual of their cosigner rights.
It is important for the consignor to understand the conditions of the notification. When an individual cosigns on a credit card, rental agreement, or loan, they take on a legal obligation to make payments if the principal borrower cannot or does not follow through.
Cosigning can hurt an individual’s credit report if:
- A payment is more than 30 days overdue: The creditor can report the late payment to the credit bureaus. Every late payment can then appear on the consignor’s credit reports, lowering their credit score;
- The automobile that was cosigned on has been repossessed: If the vehicle that an individual cosigned on is repossessed, it may harm their credit regardless of whether or not they utilized it; and
- The account has been assigned to collections: Even if an individual was unaware that the primary borrower was behind on payments, a collection account might harm their credit;
- This can also happen with rental agreements, even if the landlord is not reporting on-time rental payments.
It is also important to note that opening a new account may harm an individual’s credit score because it adds a hard inquiry to their credit report and will lower the average age of existing accounts. Although these may be minor considerations, an individual may see a drop in their results immediately after an account is opened and reported.
Can I Recover Property or Fees From a Loan That I Cosigned On?
Although it is best to be prepared for the worst-case scenario before consigning on loan, there are several steps an individual can take to recover losses they incurred if a loan goes into default, including:
- Ask if the borrower would be able to resume making payments;
- If the borrower is unable to continue making payments, determine whether the individual’s budget will allow them to assume payments or ownership properties;
- If an individual has assumed the entire payment amount, consider whether the borrower will transfer their ownership interest in exchange;
- If an individual has obtained an ownership interest over the properties attached to the loan, they should check to see if they can have the loan refinanced to reflect their sole ownership and whether they may legally purchase the property;
- Inquire whether any properties tied to the loan may be sold in order to protect the individual’s credit rating; and
- Consult with the primary borrower in order to determine whether they can repay the individual the money that they spent in getting the loan out of default status.
Do I Need a Lawyer to Advise Me on Cosigning a Loan?
If you are considering cosigning on a loan, it is a very personal decision, but it may have severe consequences for you. It may be helpful to consult with a credit lawyer before you cosign in order to obtain counseling regarding your options and their possible consequences.
It is important to enter into a written contract with the borrower where you outline the specific steps that will be taken in the event that the borrower goes into default with their lender. Your lawyer can help you draft this type of contract to ensure that your interests are protected.
