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ASDF_MEDIA/Shutterstock 4 min read Published October 12, 2022 Written by Kellye Guinan Written by Kellye GuinanArrow Right Kellye Guinan Edited by Aylea Wilkins Edited by Aylea WilkinsArrow RightLoans Editor, Former Insurance Editor Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. When you co-sign a loan, you promise to pay off somebody else's debt if the borrower stops making payments for any reason. This is a generous act, as it can help a friend or family member get approved for a loan that they otherwise wouldn’t qualify for. But it’s also risky to guarantee a loan for somebody else. Learn what happens when you co-sign and loan and the risks it can create for your own financial stability. A co-signer helps a borrower get approved by adding their name to the application. This is different from being a co-applicant; a co-signer is not applying to use any of the money in the loan. Instead, the co-signer guarantees that they will repay the loan if the borrower stops making payments or defaults entirely. In addition to being responsible for repaying the loan if the borrower cannot or does not, a co-signer may also have to repay: Co-signers are necessary when the borrower is unable to qualify for a loan on their own. There are different reasons this might happen, such as:
Co-signers typically have enough income and sufficient credit scores to strengthen the loan application. With the co-signer involved, lenders may decide to approve an application. The Risks of Co-SigningHelping a family member (or a very close friend) qualify for a loan comes with risks. It's important to understand what those risks are before you agree to become a co-signer. Damage to Your CreditIf the borrower does not repay the loan as agreed, your credit suffers along with the primary borrower’s credit. Late and missed payments appear on your credit reports, which will cause your credit scores to fall. As a result, it gets harder for you to get loans, and there may be other consequences (like higher insurance rates). Full ResponsibilityIf you co-sign for a loan, lenders will expect you to come up with the required payments, plus any additional interest and fees. It doesn’t matter if the borrower has more money than you do or is able to pay but doesn't. The lender collects wherever possible, and they take the path of least resistance. You agree to put yourself into the mix when you co-sign, and it might be easier to get funds from you. NoteIn some states, it is legal for the lender to try to collect from a co-signer before a borrower. This means you might be asked for payments before the person who actually borrowed the money. It also doesn’t matter why the borrower isn’t paying. They might lose a job, pass away, become disabled, or simply disappear. The payments must still be made, and the lender will expect you to do so in full. Legal JudgmentsIf you don’t make payments, lenders may bring legal action against you. Those attempts to collect also appear on your credit reports and do further damage. What’s more, lenders may be able to garnish your wages and take assets from your bank account if you don’t willingly make payments. Reduced Ability to BorrowWhen you co-sign a loan, other lenders see that you are responsible for the loan. As a result, they assume that you’ll be the one making payments. Co-signing reduces the amount of your monthly income that is available to make payments on new loans. Even though you’re not borrowing—and even if you never have to make a single payment on the loans you co-sign for—it’s harder for you to qualify for another loan in your own name. This can prevent you from accessing money, such as a mortgage or a car loan, when you need to. Losing Personal PropertyIf you pledge any personal property as collateral for the loan, such as a car or valuable jewelry, you can lose that property. If the borrower defaults and you are unable to make payments, the lender can claim whatever property you put up as collateral. No Easy OutWhen you co-sign, you enter into a long-term relationship. Lenders will reluctant to let you off of the loan because that decreases their chances of being repaid. It is possible to remove yourself from the loan (or get a co-signer release) in some cases, but this can be a complex process that doesn't always work. More likely, you will continue to be a co-signer until the loan is fully repaid. No OwnershipWhen you co-sign, you become responsible for the debt only. You don’t own whatever the borrower buys, and you have no right to the property just because you co-sign. If a borrower stops making payments, there might be legal procedures you can follow to regain some of what you lose. However, that process is complicated and not always successful. You may not be able to regain the full amount you lost. When Should You Agree to Co-Sign for a Loan?In some situations, it may make sense to become a co-signer for an adult child, partner, or another close relative. But how do you know when it's a good idea? You Can Afford the RiskYou should only agree to co-sign for someone else's loan if you can afford to lose the entire amount that needs to be repaid. This might be the case if you have plenty of extra cash flow and substantial assets available to pay off a loan if your borrower defaults. You will still need to verify that you will have the income and assets to qualify for any potential borrowing of your own. Remember that while you might be able to afford the risk now, you need to be able to absorb losses at an unknown time in the future, as well. You’re In It TogetherYou should only become a co-signer for someone that you completely trust. This is easier if the loan can benefit you both. If you’re essentially borrowing with somebody, it could make more sense to co-sign. For example, you might be buying a car that will be part of your household, and your partner needs a little boost to get approved. That said, it might be better to be a co-owner of the car and apply for the loan jointly. You Truly Want to HelpIn some cases, you may just want to help somebody else. Co-signing can pose substantial risks, but you may be willing to take those risks. Sometimes things work out fine, especially when you are co-signing for someone whose financial situation you know and trust. However, you still need to be prepared for things to go badly. Alternatives to Co-SigningBefore you co-sign, evaluate the alternatives. There are other choices for sharing some of the burden of a loan that can keep everybody's finances safe and secure. Help With a Down PaymentInstead of co-signing so that lenders approve your borrower, help out with a down payment instead. A bigger down payment could result in lower required monthly payments—making it easier for the borrower to qualify with limited income. For this option, you need to:
Discuss whether or not you’re making a gift, and if you need to set up a formal private loan agreement. Check with a CPA and attorney to identify and avoid any potential issues. NoteIf you are helping with a down payment, some lenders may require you to submit a "gift letter," which states that the amount you are contributing doesn't need to be repaid. LendYou can lend the money yourself if the borrower can't otherwise get approved and you don't want to co-sign. This is called a private loan, where you are the bank. If you go with the option, be sure that you:
There are downsides to private loans, however. Loaning money between family and friends can make personal relationships awkward, especially if the borrower has trouble repaying. Private loans can also make it difficult for the borrower to build credit unless you report payments to credit bureaus. Tips for Becoming a Co-SignerIf you decide that co-signing makes sense for you, manage the risks to protect yourself and your relationship. Don't be surprised if you have to pay: many co-signers end up repaying all or part of a loan.
Helping somebody get a loan is a generous gesture, but it’s critical to understand the risks before doing so. There’s a reason a lender wants a co-signer: they aren't confident that the primary borrower can repay in full and on-time. If a professional lender isn’t comfortable with the borrower, you need to have full trust in them, and the ability to repay the loan yourself if they cannot, before you take on the risk of co-signing someone else's loan. Frequently Asked Questions (FAQs)If my spouse needs a co-signer for a loan, does it have to be me?No, a lender can't require a spouse to co-sign for another spouse. Your spouse can ask someone else, like a parent or sibling, to co-sign if you can't or won't. Will my co-signer be liable for the debt that was co-signed if I declare bankruptcy?While a bankruptcy can take away some of your debt, including the loan you got with a co-signer, your bankruptcy case does not absolve your co-signer from responsibility for the debt. There could be some variations in how the debt is handled in a bankruptcy depending on your situation, so it's best to ask your lawyer how it will affect your co-signer. Does my auto loan co-signer need to be present when I buy a car?Your co-signer will need to sign many of the documents you'll be signing when you buy a car, but they may not need to be present when your purchase is finalized. Your dealership or lender may be able to have your co-signer sign the loan documents electronically, through a service like DocuSign. Was this page helpful? Thanks for your feedback! Tell us why! Other SubmitSources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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