Co-signer Rights, Responsibilities, and Considerations
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A co-signer is a third-party who guarantees the debt of another person. Friends and family members often co-sign loans for loved ones with poor credit or no credit history. Co-signers can be held accountable for these debts, so it is important to think carefully before agreeing to become a co-signer.
Written by Attorney Eric Hansen.
Updated November 12, 2021
If you know someone who’s in the market for a car loan or has been looking at refinancing an existing personal loan but they have bad credit, you may have considered becoming a co-signer to help them out. If you have a good friend or family member who has a poor credit score but needs a loan, you can use your good credit score and credit history as a co-signer to help them build their credit and get a lower interest rate. But since you’ll become responsible for paying back the loan if the borrower defaults, there’s a lot to consider before you agree.
This article will discuss what a co-signer is, the difference between a co-signer and a co-borrower, and what to consider before you sign on the dotted line.
What Is a Co-signer?
A co-signer is a third-party (family member, friend, coworker, etc.) who guarantees the debt of another person. This co-signer doesn’t receive any of the loan proceeds but gives the primary borrower a really nice benefit. Both the borrower and the co-signer are fully responsible for paying the loan. If the primary borrower doesn’t make payments or defaults on the loan and has past-due debt, then the co-signer will be held financially liable and legally responsible for repayment.
Co-signers typically need to have a good credit history and a good credit score. The primary borrower is sort of piggybacking off of the co-signer’s good credit rating. A quality co-signer usually increases the primary borrower’s chances of getting a car loan, personal loan, student loan, or mortgage. They might be just enough to help the borrower qualify for a loan that they wouldn’t ordinarily qualify for without the co-signer’s good credit score and good credit history.
Co-signing for a loan is a lot like applying for a loan. If you co-sign a loan, most lenders will do a hard credit check on your profile. The lender will want to review your income, employment information, debt-to-income ratio (DTI), and overall creditworthiness as part of the loan application and underwriting process. This hard inquiry usually causes a temporary decrease in the co-signer’s credit score, just as the hard credit pull causes a temporary dip in the primary borrower’s credit score.
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Co-signer and Co-borrower: What's the difference?
You can apply for a loan on your own or use a co-signer or co-borrower. With both a co-signer and co-borrower, the parties (the primary borrower and either the co-signer or the co-borrower) are legally responsible for full debt repayment on the loan. In both situations, the lender will do a full credit check of all parties to review their financial information during the application process.
The terms co-signer and co-borrower sound pretty similar, but there are important differences.
Co-Signer vs. Co-Borrower
The co-signer of a loan doesn’t receive the proceeds of the loan and has no title rights, ownership rights, possession rights, or repossession rights in the property of a secured loan (a car, a house, jewelry, electronics, etc.). A secured loan is simply a loan that’s backed by some kind of property. Essentially, co-signers are no more than financial guarantors.
By contrast, a co-borrower has the same rights as the primary borrower. They’re entitled to receive the loan proceeds and have title rights, ownership rights, possession rights, and repossession rights in the property of the secured loan. For auto loans, they’re on the title to the car. For mortgages and home loans, they’re on the deed to the house. Often, co-borrowers are spouses. A co-borrower’s employment income, assets, and credit score can make it easier for the primary borrower to qualify for better loan terms and higher overall loan amounts.
What To Consider Before You Cosign a Loan
Being a co-signer comes with pros and cons. You’ll need to assess your financial situation and credit, along with the primary borrower’s financial situation and credit. Ask yourself how well you know your family member, friend, or coworker and how financially responsible they are. If you know that they aren’t particularly good at managing money and credit, and you think that they’re likely to have some missed payments or default on the loan, politely and firmly decline their request for you to be their co-signer.
When you get down to it, financial responsibility is the most important thing to consider. Remember, you’re equally responsible for repaying the loan as the primary borrower is. So the primary borrower should be able to comfortably make the monthly payments under the loan contract as part of their monthly budget and expenses. If not, you as the co-signer will be responsible for any missed payments. Missed or late payments can also come with late fees, penalties, or additional interest. The co-signer will be responsible for these too.
The creditor will report credit and payment information to the three major credit bureaus, whether the credit entries are good or bad. And they will show up on both the primary borrower’s and the co-signer’s credit reports. On-time payments that develop into a positive payment history on the co-signed loan will reflect well on both the primary borrower’s and the co-signer’s credit reports. This increases your credit score.
But late payments, missed payments, a default, a repossession, or collection activity will reflect poorly on both the primary borrower’s and the co-signer’s credit reports. The credit file and credit score of both parties will take a hit and decrease when the creditor reports these negative entries to the credit bureaus.
Once you’re in as the co-signer of a loan, it may be difficult to get out. Each lender has different requirements to release a co-signer from the co-signed loan. Again, it can be very difficult to obtain a co-signer release. That’s why you and any other party involved in a loan should be thoughtful, careful, and realistic before signing the loan contract. In order to get a co-signer released from the loan, the primary borrower typically has to show that they have the right credit rating or repayment history needed to qualify for the loan on their own, without the help of the co-signer.
To recap, a co-signer is a financial guarantor of another person’s loan. They don’t really get any benefits from the loan in terms of ownership rights or the loan proceeds. The co-signer helps the primary borrower get a loan that they wouldn’t normally qualify for. Co-borrowers have ownership rights, title rights, and possession rights that a co-signer doesn’t. A co-borrower is also entitled to proceeds from the loan. A co-signer isn’t entitled to proceeds from the loan
As with the primary borrower, both co-signer and co-borrowers will undergo a hard credit check on their credit file so that the lender can review their income, employment, DTI ratio, credit score, and credit history. This check can temporarily decrease your credit score.
Financial responsibility and a realistic assessment of your financial well-being, along with your creditworthiness, are the name of the game here. If you’re considering co-signing a loan for someone, you should consider all the factors and circumstances of the loan and the primary borrower. Remember, you’re ultimately on the hook to pay for the loan if the borrower defaults and your credit score will be affected by their ability to repay the loan.