What Is a Co-Signer on a Loan? Responsibilities and Risks

A co-signer is someone who agrees to be responsible for another person’s debt. Co-signing an agreement may help a person qualify for a loan, but it may expose them to a lot of problems, including being responsible for payments, being contacted for payments, bad credit, and eventually an even bigger burden. The best way to think about it is to consider the loan a risk; even though you would never take out the loan, you might end up being obligated to make all the payments.

Key points about co-signing

• The co-signer may be responsible for repaying the balance of the loan plus interest, late payment fees, and collection costs if the primary borrower does not pay, depending on the agreement.
• If the creditor reports the account, the debt and any late or missed payments may appear on the co-signer’s credit report.
• The obligation may affect the co-signer’s ability to obtain other credit, even if the primary borrower is current on payments.
• There is generally no ownership right in the property the loan was used to purchase.
• Co-signing does not give the co-signer the right to remove their name from the loan until the creditor provides a written release or the debt is otherwise satisfied.
• Co-signing may not be a good idea, as the negatives may outweigh the good.

What a co-signer agrees to do

When a borrower has insufficient credit, low income, or high risk, a creditor may accept a co-signer. Co-signers can be used with several kinds of credit, including private student loans, leases, auto financing, and personal loans. Whether a creditor accepts a co-signer is determined on a case-by-case basis, depending on the borrower’s circumstances and the creditor’s policies.

Having a co-signer with a strong credit history and a healthy income will not guarantee approval or lower interest rates. The creditor may consider whether the applicants’ income is sufficient and stable enough to repay the credit, but a high income does not guarantee approval.

The Federal Trade Commission explains that a co-signer may be responsible for the full debt and related costs if the borrower does not pay. The creditor may also have the right to collect the debt from the co-signer without going after the borrower first. Depending on applicable laws and agreements, some real estate transactions may change the collection order.

Co-signer and co-borrower are not the same

Both may be legally obligated to repay the loan. However, each fulfills a different role. People listed on documents such as a car title or house deed may have ownership rights, but ownership is determined by those documents, not by the label used on the loan.

How co-signing can affect your credit and budget

If the creditor reports the account to the credit reporting agencies, it may become an obligation on the co-signer’s credit report. It does not mean the obligation will definitely impact the co-signer’s credit score. Credit score models use different methods to calculate scores. A late or missed payment may be reported for both the primary borrower and the co-signer, and its effect can depend on the reported information and the scoring model used.

Co-signing a loan can impact a future credit application. An evaluator may add the co-signed payment to the debt obligations the co-signer has and their ability to sustain new debt. There are many factors that affect how a creditor evaluates a loan, and a co-signer cannot determine that the debt will be ignored just because the primary borrower promised to pay the debt.

Debt-to-income ratio and credit score are different concepts. Income is not part of a credit score, so co-signing does not change a credit score’s debt-to-income ratio. A creditor may separately calculate a potential borrower’s debt-to-income ratio and count co-signed payments as obligations when determining whether a loan is appropriate.

Before putting your name on the agreement

Trust is needed, but a repayment plan is still necessary. Before a signature, imagine the borrower already told you that you would have to take over the payments.

1. Limit exposure. Look at the financing, APR, payment, term, total payment, late fees, collection fees, and any collateral. Find out what you could owe if the borrower defaults.
2. See if you can afford the payments. Decide if you can afford to make the payment without jeopardizing your food, housing, or utilities. Also, consider other debt payments and insurance payments.
3. Understand the borrower’s strategy. Find out if the borrower has a plan to cover the essential expenses and debts after saving for emergencies. Also, understand how the borrower will cover essential expenses if there is a loss of income.
4. Request documentation. Keep the signed agreement and disclosures. Ask the creditor to send regular statements and notices if the borrower misses a payment or the account materially changes. Do not rely on sharing the borrower’s login information.
5. Reread the release terms. Understand the rules and terms for the release. Know the payment history, credit review terms, and application terms before signing.
6. Protect your information. Do not provide Social Security or banking information unless it is through a secure process. The FTC states that asking for an up-front payment in order to guarantee loan approval is a red flag for an advance-fee loan scam.

What may happen when the borrower misses payments

The consequences for missing a loan payment are determined by the loan agreement, creditor, loan type, and applicable state laws. The co-signer needs to call the creditor as soon as the missed payment is discovered and not wait until the account goes into default. Possible consequences include the following:

• additional interest or late fees charged as allowed by the contract;
• reporting the account to credit reporting agencies in accordance with applicable law;
• contacting the co-signer with collection calls or letters;
• acceleration of the balance as allowed by the contract; and
• filing a lawsuit to collect the debt and using the remedies available under state law and procedure.

A private contract in which the borrower agrees to reimburse the co-signer only establishes the obligations between them and does not normally change the creditor’s rights as established by the loan contract. Anyone considering this type of private contract needs to obtain legal advice in their state.

How a co-signer’s obligation can end

Co-signers cannot typically remove themselves from a contract by requesting it on their own. As long as the original debt is not paid and the creditor does not issue a release, the obligation usually continues. There are a few ways to potentially remove the obligation. These include:

• Contractual release: Some contracts allow for a release to be requested by the primary borrower after the creditor evaluates the borrower’s payment, income, and credit. This is lender- and product-specific.
• Refinancing: The primary borrower may be able to apply for a new loan in their own name to pay off the original balance. Approval and savings cannot be guaranteed.
• Payoff: The obligation is removed once the debt has been repaid and the creditor has recorded the account as satisfied.
• Sale of collateral: A loan is satisfied by the sale of a financed asset only if the sale, in combination with any additional payment, satisfies the balance in full.

Some private student loans offer release programs. The Consumer Financial Protection Bureau advises that, instead of assuming a release will occur, the private student loan co-signer should check the contract terms and the lender or servicer’s published criteria.

Other ways to address a weak application

There are alternative responses to a declined application besides a co-signer. A borrower may request a smaller loan amount, increase their down payment, remove errors on their credit report, reduce their debt, document more stable income, or save longer to afford the payment. A secured loan places the pledged asset at risk and should not be assumed to have more safety than a standard loan.

A credit-builder loan may address the issues of limited credit history and the lack of payment history without making a friend or relative responsible for the same debt. Costs, reporting practices, and availability still need to be compared.

Common questions about co-signing

Does co-signing give you ownership of the financed property?

Co-signing by itself does not result in ownership of the financed property. Generally, a person is not placed on the title or deed of property by co-signing. Ownership has to be established in the corresponding ownership documents.

Does co-signing always lower the borrower’s interest rate?

Co-signing a loan does not guarantee a lower interest rate for the borrower. A qualified co-signer may improve a loan application; however, the lender decides the rate and the terms of the loan. The outcome is the result of the lender’s decision, the information from the applicants, the product, and the law.

Can good payment history help the co-signer’s credit?

Good payment history may affect the co-signer’s credit if the lender reports the account, but an increase is not guaranteed. Credit score models weigh reported accounts differently, and the additional obligation may still affect future credit decisions.

What happens if the primary borrower dies?

Co-signer responsibility may still exist, but this may also depend on the agreement, the borrower’s estate, the type of loan, insurance, and state law. The co-signer should call the lender and possibly retain a lawyer before reaching any conclusions.

Decide as if the debt were your own

Co-signing someone else’s loan does not create any rights of ownership. In fact, co-signing creates a significant financial risk. Co-signing is only to be done after careful evaluation. Consider the entire cost, and confirm whether you could pay the debt before co-signing. Co-signing must be done after you have full access to payment information and know the exact terms and conditions for how you can be released from your co-signing obligation.