Co-signing is a financial arrangement where an individual, known as a co-signer, signs a loan or financial agreement alongside the primary borrower. By doing so, the co-signer assumes the legal obligation to be a backup repayment source for the loan (Merriam-Webster, n.d.).
Key Facts
- Definition: Co-signing is when a person signs a loan or financial agreement alongside the primary borrower, taking on the legal obligation to be a backup repayment source for the loan.
- Purpose: Co-signing is typically done to help the primary borrower obtain a loan or secure more favorable loan terms. It can be beneficial for individuals with low income or minimal credit history.
- Joint Responsibility: When you co-sign a loan, you become equally responsible for ensuring that the loan is paid back. If the primary borrower fails to make the monthly loan payments, you will be asked to make the payment. Any missed payments can also appear on your credit reports and impact your credit scores.
- Risk and Consequences: Co-signing a loan carries risks. If the primary borrower defaults on the loan, the lender may repossess and sell the financed item. Depending on state law, the lender could also sue both the primary borrower and the co-signer for the outstanding loan balance.
Purpose
Co-signing is typically done to assist the primary borrower in obtaining a loan or securing more favorable loan terms. It can be particularly beneficial for individuals with low income or limited credit history (Investopedia, n.d.).
Joint Responsibility
When co-signing a loan, the co-signer becomes equally responsible for ensuring that the loan is repaid. If the primary borrower fails to make the monthly loan payments, the co-signer is obligated to make the payment. Missed payments can negatively impact both the co-signer’s and the primary borrower’s credit scores (Consumer Financial Protection Bureau, n.d.).
Risks and Consequences
Co-signing a loan carries significant risks. If the primary borrower defaults on the loan, the lender may repossess and sell the financed item. Furthermore, depending on state law, the lender may initiate legal action against both the primary borrower and the co-signer to recover the outstanding loan balance (Consumer Financial Protection Bureau, n.d.).
Sources
- Consumer Financial Protection Bureau. (n.d.). Should I agree to co-sign someone else’s car loan? Retrieved from https://www.consumerfinance.gov/ask-cfpb/should-i-agree-to-co-sign-someone-elses-car-loan-en-813/
- Investopedia. (n.d.). Cosign: What it Means in Lending, Types and Examples. Retrieved from https://www.investopedia.com/terms/c/co_sign.asp
- Merriam-Webster. (n.d.). Cosigner. Retrieved from https://www.merriam-webster.com/dictionary/cosigner
FAQs
What is co-signing?
Co-signing is when an individual, known as a co-signer, signs a loan or financial agreement alongside the primary borrower, taking on the legal obligation to be a backup repayment source for the loan.
Why would someone co-sign a loan?
Co-signing is typically done to help the primary borrower obtain a loan or secure more favorable loan terms. It can be beneficial for individuals with low income or minimal credit history.
What are the risks of co-signing a loan?
Co-signing a loan carries risks. If the primary borrower defaults on the loan, the lender may repossess and sell the financed item. Depending on state law, the lender could also sue both the primary borrower and the co-signer for the outstanding loan balance.
What should I consider before co-signing a loan?
Before co-signing a loan, you should carefully consider your financial situation and the risks involved. You should also make sure that you understand the terms of the loan and that you are comfortable with the repayment obligations.
Can I get my name removed from a co-signed loan?
In some cases, it may be possible to get your name removed from a co-signed loan. However, this is typically only possible if the primary borrower has established a good payment history and can qualify for the loan on their own.
What happens if the primary borrower defaults on the loan?
If the primary borrower defaults on the loan, the lender will typically contact the co-signer and demand payment. The co-signer is then obligated to make the payments or risk damaging their own credit score.
Can co-signing a loan affect my credit score?
Yes, co-signing a loan can affect your credit score. If the primary borrower makes late payments or defaults on the loan, it can negatively impact your credit score as well.
Should I co-sign a loan?
The decision of whether or not to co-sign a loan is a personal one. You should carefully consider the risks and benefits involved before making a decision.