A co-signer is someone who adds their name to the primary borrower’s loan application, agreeing to be legally responsible for the loan amount and any additional fees if the borrower doesn’t make the payments. Co-signers might also be asked to guarantee payments on credit cards or utility or phone bills so a person doesn’t have to leave a large deposit when they set up a new service.
If you co-sign a loan, you can help a person qualify for a financial product they could not get on their own, or save them interest by getting a lower rate based on the co-signer’s credit score. When someone is new to credit or is rebuilding their finances, having a co-signer with a good score and an established credit history is powerful. If they make their payments on time, they build a good credit history which allows them to get better rates in the future.
If you are asked to co-sign a loan, card, or other bill, there are some things to carefully consider. You are responsible for the entire loan amount. Co-signing a loan is not just about lending your good credit reputation to help someone else. It’s a promise to pay their debt obligations if they are unable to do so, including any late fees or collection costs.
You are risking your credit score and ability to borrow. When you co-sign a loan, both the loan and payment history show up on your credit reports as well as the borrower’s. Any missed payment by the borrower will negatively affect your credit score. You may be rejected for credit when you want it because the co-signed loan will be considered when a potential creditor calculates your total debt levels.
The borrower may start out making full, on-time payments toward the loan or credit card with good intentions. But financial and personal situations change. Divorces happen and often include financial messes. Children who run into trouble with payments may hide the shortfall from their parents until the financial institution notifies the parents that they owe the payments, ruining trust in the relationship.
Most financial experts say you should never co-sign. You have very little to gain and a lot to lose. So what are some alternatives?
You might ask if there can be collateral on the loan. This is typical for car loans and allows for a lower interest rate. The lender can repossess if payments are not made. You might also use other accounts, like a certificate of deposit or an IRA, as collateral, again to be taken if payments are not made.
You might want to open a joint account with the borrower at the lending institution where the loan is. Authorize the lender to take funds from this account if payments are not made by a certain time. You will be able to access the account online as a co-owner, so you know quickly if the debtor isn’t making payments.
Ask the lending institution if you can be a guarantor instead of a co-signer. The cosigner, simply by signing onto the debt, is liable for the debt without the creditor needing to take any additional actions. The guarantor is only liable for the debt after the creditor has exhausted all other options of collections from the original borrower. You may have to pay for the debt, but it won’t damage your credit score until the financial institution notifies you that the loan is in default and they have been unable to collect.
Consider this warning from a bank or credit union when you co-sign a loan: You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not 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, including suing you or garnishing your wages. If this debt is ever in default, that fact may become a part of your credit record.