What happens to Cosigners

What Happens to Cosigners: The Ins and Outs of Co-Signing a Loan

So your friend or family member has asked you to co-sign a loan for them. You want to help them out, but aren’t sure what it really means for you. Cosigning a loan is a big responsibility—you’re promising the lender that you’ll pay if the primary borrower can’t. Before you make this commitment, it’s important to understand exactly what you’re getting into. We’ll walk through what happens before, during, and after co-signing so you can make an informed decision.

The Basics of Co-Signing

When you co-sign a loan, you and the primary borrower are both fully responsible for repaying it. The lender can come after you for the payments if the primary borrower misses any. It doesn’t matter if you don’t receive any of the loan proceeds or benefit from the purchase—you’re still on the hook.

People often turn to co-signers when they have poor or limited credit history and don’t qualify for a loan on their own. By adding your name to the application, you’re letting the lender use information from your credit report to evaluate the risk of the loan. If you have good credit, it can help offset any issues with the primary borrower’s credit and get the loan approved.

Before Co-Signing

Before you agree to co-sign, be sure you fully understand the commitment you’re making. Here’s what to consider:

• Can the primary borrower afford the payments? Look at their income, expenses, and existing debts to determine if they can realistically handle the new obligation.
• How will co-signing affect you? Adding a new loan could negatively impact your debt-to-income ratio and hurt your ability to get credit in the future.
• Are you prepared to make the payments? You need to be comfortable paying the loan if the primary borrower can’t.
• Have you discussed expectations and ground rules? Make sure you’re on the same page about things like repayment terms, late payments, etc.

It’s also a good idea to review the loan agreement so you understand the repayment schedule, interest rate, fees, collateral, and other terms. Be sure to check your credit report too so there aren’t any surprises.

During the Loan Term

Once you sign the loan agreement as co-signer, here’s what you can expect:

• The loan will appear on your credit report – Any late or missed payments will also be reported and hurt your credit score.
• You may not get notices from the lender – They aren’t required to keep you updated on the account status.
• The primary borrower is responsible for making payments – But you need to make sure they’re on track.
• You may be asked to pay if the primary borrower defaults – The lender can pursue legal action against both of you.

During the loan term, you should periodically check in with the primary borrower to confirm they’re making on-time payments. Review your credit report too so you aren’t caught off guard by any negative information. If you notice anything amiss, reach out to the lender right away.

Options if the Primary Borrower Defaults

Defaulting on a loan happens when the primary borrower misses payments. If this occurs, here are some options:

• Take over the payments – You can choose to start making the monthly payments yourself and avoid further issues.
• Refi or modify the loan – See if you can get better terms to make the payments more affordable.
• Sell collateral – If the loan is secured by property, try selling it to pay off the balance.
• Negotiate a settlement – Work with the lender to settle for a lesser payoff amount.
• File for bankruptcy – This can eliminate or restructure debts for a fresh start.
• Let the lender pursue legal action – They may garnish wages, put liens on property, or sue for payment.

If at all possible, you want to avoid the lender taking legal action. This can seriously damage your finances and credit for years. Instead, be proactive about finding a solution if you notice the primary borrower struggling.

After the Loan is Paid Off

Once the last payment is made and the loan is satisfied, make sure you take these steps:

• Review your credit report – Verify the loan is closed and there are no outstanding issues reported.
• Cancel automatic payments – If you were making payments, update your bank account.
• Update your debt – Remove the loan from any lists you keep of your obligations.
• Shift focus – With this liability gone, you can work on other financial goals.

Co-signing a loan is a huge responsibility. While you may want to help someone out, make sure you fully grasp what’s involved first. Check in routinely after signing to catch any problems early. With diligence, you can avoid major headaches. Good luck!

Sources: What Happens When You Cosign a Loan? What Happens When a Loan Co-Signer Doesn’t Pay? What to Do When a Co-Signer Doesn’t Pay