Co-signer rights & responsibilities: How co-signing works

For students heading back to school with a poor credit history or no credit history at all, finding a private student loan lender to finance their education where scholarships, grants and federal aid falls short can be tricky. And education costs aren’t the only expenses that may arise — it’s also challenging to get a car loan without a long credit history or with poor credit.

Whether you’re a parent, family member or friend with a solid credit history, you may want to co-sign a loan and improve your loved one’s chances to get funded. But becoming a co-signer should not be taken lightly. A co-signer takes on all the rights and responsibilities of a loan along with the borrower. This means that if the borrower can’t make a payment on the loan, the co-signer is responsible.

What is a co-signer?

A co-signer is a person who guarantees another individual’s debt. They are equally responsible for the debt and must pay if the borrower does not make payments or defaults on the loan.

Who can be a co-signer comes down to credit history and standing. A co-signer must have their income, assets, credit score and debt-to-income ratio in good shape to receive approval.

What is the difference between a co-signer and a co-borrower?

The credit scores and financial details of both parties are also considered in the application when it comes to co-borrowers. While both co-signers and co-borrowers take on full responsibility for a loan, the two have differences. The biggest difference is co-borrowers — also known as joint borrowers — have access to the loan funds.

Co-signer rights and responsibilities

The differences between co-signers and co-borrowers extend into the rights and responsibilities of the person signing on. Co-signers have very little rights when it comes to the money borrowed and anything bought with that money. A co-signer can also be removed or released in some cases.

Unlike co-borrowers, who are on the title or have some claim to the property or funds, co-signers have no title or ownership of the property the funds are used for. For example, a co-signer for a vehicle has no legal right to the financed vehicle.

When it comes to responsibilities, the co-signer is legally obligated to repay the loan — but only socially expected to if the primary signer falls behind. Even so, the responsibility comes with consequences. Failing to pay will affect a co-signer’s credit as well as the credit of the primary borrower.

4 considerations before co-signing

If you are considering becoming a co-signer for a friend or a family member, think through the impact it may have on you and your financial history before agreeing to sign on to the loan. It is also important to make sure you know the interest rate on the loan and calculate its monthly payments, as this will impact how risky it may be to co-sign.

On the most basic level, being a co-signer for someone else’s loan can hurt your credit. Consider the following before you take on additional debt.

1. The type of loan you’re co-signing for

Secured loans put collateral on the line — a house, a car or another piece of property. This means less risk for the bank because the collateral will be seized if the primary borrower cannot make their payments and you don’t fulfill your obligation. However, you should consider when this is a good idea for all individuals involved, especially if it’s your asset at risk.

2. Your financial situation

Generally, lenders want to see co-signers with high credit scores, blemish-free credit reports and long histories of consistent, on-time payments. They’ll also want you to have steady employment and verifiable income.

It is also important to remember your credit will be affected even if payments are made in full and on time. A loan you co-sign will be added to your credit history, which will impact your credit score. Before agreeing to co-sign, consider the importance of your credit report. If keeping it in tip-top shape is a priority, then decide if you are willing to risk that by co-signing for a loan.

3. Your relationship with the primary borrower

You shouldn’t co-sign a loan for just anyone. Think about your relationship with the primary borrower and consider how well you can trust them. You’ll want to be able to have open and honest conversations with the primary borrower about money. You both need to feel good about the agreement. The last thing you want is to ruin your relationship over financial tension.

Think of it this way, when you agree to be a co-signer, you agree that collections can hold you responsible for a defaulted loan amount. According to the Federal Trade Commission, a co-signer can face collections for the loan amount before the primary borrower.

So while it is smart to consider your relationship with the primary borrower as it stands, also think ahead to how future collections calls could lead to strife. If you do not trust the primary borrower to make on-time payments or see a risk of a damaged relationship, it’s best not to agree to co-sign in the first place.

4. The long-term implications of being a co-signer

If you’re co-signing a loan to help your child go to college or build up credit early on, then the risk may be worth it in the long run. Think of it this way, co-signing for your child who is majoring in electrical engineering will get benefits in dividends with a median salary of $115,000, according to Bankrate’s College Majors Study.

On the other hand, if you’re simply helping a friend pay off credit card debt or buy a car that’s outside of their price range, it’s probably not the best move for you or for them. It can potentially damage both of your finances, and may not be an absolute necessity.

Should I co-sign a loan?

Consider the state of the primary borrower’s finances when deciding whether to co-sign. This can become complicated for a parent co-signing for their child with little to no credit history. Lauren Nowacki, a personal finance expert, shares advice for making that decision.

Bottom line

Agreeing to co-sign a loan for a family member or friend can help them reach financial milestones that might not have been possible without your help. But, when you co-sign a loan, you take on financial responsibility.

It’s also important to keep in mind not all lenders offer the ability to add co-signers. If this is of top priority, shop with that in mind when comparing personal loan rates.