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Just Say No- Caution to Cosigners

July 21, 2016

We’ve all heard stories time and time again from our friends and families about their cosigning mistakes. We may hear of a friend who cosigned on a loan for his girlfriend, they broke up, she stopped paying, and it destroyed his credit, or, maybe a parent stepped in as a cosigner for a child with no established credit for his first car and ended up making the payments. 

You may feel compelled or obligated to help someone during hard financial times by cosigning on a loan. Before making your decision here’s what you should consider:

Why You Should Not Cosign On a Loan (For Anyone)

  1. There is a considerable chance you will be responsible for the debt when the borrower doesn’t pay.

Those who need cosigners are generally risky borrowers that already have bad credit for not paying back their loans, have too much debt, or do not pay back their debts on time. The lender requires a cosigner because he realizes the borrower will likely not be able to pay off the debt on his own and needs a back-up method of receiving payment.

Although the act of cosigning always accompanies good intentions and trust, when a cosigner cosigns on a loan he is agreeing to “guarantee” the debt, which is why “cosigners” are also often called “guarantors”.

To guarantee someone else’s debt means that the guarantor is accepting equal responsibility for the borrower’s contractual obligations via a written agreement upon which both parties sign (borrower and cosigner). These agreements are also sometimes called “surety contracts”.

A cosigner is different from a co-buyer, co-borrower or co-applicant because a cosigner does not receive any tangible benefit from the agreement, but still undertakes liability for the debt in the event the borrower does not pay.

Therefore, if the borrower does not pay back the debt, the cosigner becomes ultimately and absolutely responsible. This means the lender can go after the cosigner’s assets, including cars and homes, and sue the cosigner personally, to satisfy the debt.

2. It can adversely affect your credit score.

Because the cosigner is accepting liability for the debt equally, the borrower’s non-payment, late payment or court judgment affects the cosigner’s credit score as well.

As we all know, credit scores become a factor in any major purchase, and a bad score could disqualify the cosigner from receiving better financing and lower interest rates on his own large purchases.

And, because some insurers base their premiums in part on credit history, a bad credit score could even increase the amount of money the cosigner would pay in future auto or homeowners insurance premiums.

In the worst-case scenario, this bad credit rating could even prevent the cosigner from being able to buy his own home or automobile by inhibiting the cosigner from obtaining a mortgage or loan.

3. Even if you accept the risk of having to pay off the loan yourself, you may end up forking over more money than you could have ever thought possible.

When a borrower defaults on his loan, the cosigner also becomes responsible for all origination fees, interest payments, late fees, collection fees, and even attorneys’ fees accrued by the lender for pursuance of the debt. These fees can add up to thousands of dollars over and above the actual value of the item being financed.

4. Your relationship with the borrower (or your friend or family member) will be tarnished.

After months or years of fights, nagging over bills going unpaid, and built-up resentment over losses of thousands of dollars and a ruined credit score, it would be pretty difficult to maintain a healthy relationship with the borrower after all is said and done.

All things considered, it is certainly in your best financial interest to decline any request to cosign on another person’s loan. For more information, call us to speak with one of our attorneys at 716-636-7600