Cosigning a loan: what your signature really commits you to

When you cosign, the debt is legally yours as much as the borrower’s. You can be made to pay the full balance plus late fees and collection costs, in most states the lender can come to you without first trying to collect from the borrower, and the loan and its payment history go on your credit reports. What you get in return is nothing you own: the car, the apartment or the degree belongs to the other person.

What your signature commits you to

A cosigner guarantees the whole debt, not a share of it. Under the FTC’s Credit Practices Rule, lenders it covers must hand you a separate “Notice to Cosigner” before you sign. It says, in part: “You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to.” It goes on to warn that you may have to pay up to the full amount, plus late fees or collection costs, and that the creditor can use the same collection methods against you as against the borrower, such as suing you or garnishing your wages.

The FTC’s cosigning guide notes that some states require the lender to try the borrower first. Most do not, so if a payment is missed, the first call can come to you. If the lender sues and wins a judgment, it can then collect from your wages or bank account within the limits of federal and state law.

A cosigner is different from a co-borrower. A co-borrower on a car loan or mortgage usually shares ownership and is on the title. A cosigner takes on the same liability with no claim to the asset, so if the borrower stops paying and keeps the car, you owe the payments on a car you cannot sell.

How it shows up on your credit

The lender checks your credit before approving the loan, which usually means a hard inquiry on your report. Once the loan opens, it appears on your reports at Equifax, Experian and TransUnion as your account, with its full balance and every payment.

On-time payments help both of you. A payment that is 30 or more days late can be reported on your file exactly as on the borrower’s, and it stays there for seven years. You will not necessarily hear about it first: the statements go to the borrower unless you arrange otherwise. The FTC suggests asking the lender, in writing, to send you notice of any missed payment, and getting copies of all loan documents.

What it does to your own borrowing

Lenders treat the payment as your obligation when they calculate your debt-to-income ratio. Car loans are the usual case. This is the average 48-month new car loan APR at commercial banks:

Say you cosign a $30,000 car loan over 48 months, and the rate is 7% in this example. The payment is $718.39. If you earn $6,000 a month and already pay $2,000 toward your own debts, your ratio goes from 33.3% to 45.3%, which can be enough to push you past a lender’s limit.

There is an exception that matters if you later apply for a mortgage. Fannie Mae’s guidelines let a lender exclude a debt you are obligated on but someone else pays, if you provide the most recent 12 months of canceled checks or bank statements from the person making the payments, showing no late payments. So from the day you cosign, keep proof that the borrower pays from their own account. Without it, the payment counts as yours. Other lenders, including card issuers and personal loan lenders, set their own policies.

Getting your name off the loan

There are three ways out, and none is in your control.

• Cosigner release. Some loans, mostly private student loans, let the borrower apply to release the cosigner after a run of on-time payments, if the borrower now qualifies alone. Approval is far from automatic: in 2015, the CFPB found that companies rejected 90% of the private student loan borrowers who applied for cosigner release. Many auto and personal loans have no release clause at all. Read the contract before you sign; if there is no release provision, assume you are on the loan until it is paid off.
• Refinancing. The borrower takes out a new loan in their own name and pays off the old one. That works only if the borrower can qualify alone, the same test they failed when they needed you.
• Paying it off or selling the asset. Selling a car ends your liability only if the sale covers the full payoff.

Private student loans signed on or after November 20, 2018, carry two federal protections from the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. The lender cannot declare the loan in default solely because a cosigner dies or files for bankruptcy, and it must release the cosigner within a reasonable time after learning that the student borrower has died. Contracts signed before that date can still contain those “auto-default” clauses, so check yours.

Before you say yes

1. Ask the lender how much you could owe in total, including fees, and confirm whether the contract has a cosigner release and what it requires.
2. Make sure you could make every payment yourself, starting next month, without hardship. If you could not, the answer should be no.
3. Set up your own online access to the account, or written notice of missed payments, so you learn about trouble within days.
4. Keep the borrower’s payment records from the start, for your own future mortgage application.
5. Talk with the borrower about what happens if they lose their job, including whether you would take over payments or sell the asset.

There are often safer ways to help. Adding someone as an authorized user on your card helps build their history while you keep control of the account. A gift toward a larger down payment can shrink the loan enough for them to qualify alone. A secured card or credit builder loan lets them start building credit without your name on anything. A personal loan from you, written down with a payment schedule, puts your money at risk but not your credit.