Co-signer rights: What you need to know

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If you have solid credit and steady finances, there’s a chance you may be asked to co-sign a loan for a friend or family member at some point in life. It could be to help them purchase a house, buy a car or even just take out a personal or student loan. Either way, having you on the application can increase your loved one’s chances of approval — especially if they have poor credit or insufficient financial resources.

Unfortunately, the move might not be as beneficial for you. Though there’s a chance that co-signing another person’s loan could improve your credit score, that’s not always the case. In fact, there are quite a few risks that come with being a co-signer, and if you’ve been asked to be one yourself, it’s important to consider it from every angle before agreeing to move forward.

What is a co-signer?

A co-signer is a person who has agreed to guarantee the debt of another individual but does not receive any of the loan proceeds. In other words, a co-signer is responsible for the debt if the borrower does not make payments or defaults on the loan entirely.

“A co-signer serves as an additional repayment source for the lender,” says Adam Marlowe, principal experience officer for Georgia’s Own Credit Union. “They are a safety net for the lender because they are responsible for the loan in case the primary borrower fails to pay. The co-signer lends his or her good name and credit history to help another borrower obtain financing.”

Having a co-signer can help a loan applicant obtain not only the loan itself, but also more money than they might otherwise be eligible for and more favorable terms.

How do I know if I’m a co-signer?

If you’re unsure whether you’ve served as someone’s co-signer in the past, there are a few telltale signs.

“Co-signers are required to sign loan documents outlining the terms and conditions of the obligation,” says Rich Tambor, chief risk officer at OneMain Financial. “You must also sign and receive a copy of the Notice to Co-Signer, which is a notice required to be provided to you by the Federal Trade Commission.”

The bottom line? You can’t be made into a co-signer without your knowledge and consent.

Co-signer rights and responsibilities

If you’re considering co-signing a loan for someone you know, it’s important to know your rights and responsibilities first.

Ownership of property

Unfortunately, being a co-signer doesn’t give you rights to the property, car or other security that the loan is paying for. You’re simply a financial guarantor, and if the primary signer fails to repay the debt, then you’re next in line to make it happen.

Repayment of the debt

The most important thing to note is your financial responsibility. Though the primary borrower should make the established monthly payments on the loan, that doesn’t mean they always will. If they don’t, it’s your responsibility to pick up the slack. Depending on how late they are, you also may owe penalties, late fees, additional interest and more.

Application consideration

Credit history, credit score, income, debts, employment and other financial details are all likely to be considered as part of the loan application when you agree to become a co-signer for someone.

“A lender will look for a co-signer to strengthen the credit profile of an application, generally because the borrower doesn’t qualify on their own,” says Tambor. Because of this, you’ll likely have to go through a hard credit check when the primary borrower submits their application.

Credit impact

It’s important to understand that serving as a co-signer can ultimately hurt your own credit score if the borrower makes payments late, since any actions on the loan are tied to both the primary borrower’s and your credit reports.

On the other hand, being a co-signer can also help improve your credit score if the borrower is someone who is responsible about consistently making payments on time.

Removal from the loan

If the primary signer on the loan stops making payments or falls behind, you can request a co-signer release. This is a form that the primary borrower will need to sign off on releasing you from the obligations of the loan.

In addition, the lender also must approve the removal of the co-signer (which it will only do if the primary borrower can demonstrate that they have the credit and history to handle the payments).

Co-signer considerations

There’s a lot to think about if you’ve been asked to co-sign on someone’s loan. Your good credit could help a friend or loved one achieve their financial goals, but is it a good thing for you? Here are a few things to consider before signing on the dotted line:

  • The type of loan you’re co-signing for. Secured loans are riskier for borrowers because there’s collateral on the line — a house, car or another piece of property. Any added risk for the primary borrower is added risk for the co-signer, too. (For example, a HELOC might seem like an easy way for you to help your child pay off a massive medical debt, but it also puts their house at risk. If they can’t keep up their HELOC payments, as well as their current mortgage loan, where will that leave you?)
  • Your financial situation. Generally, lenders want to see co-signers with high credit scores, a blemish-free credit report and a long history of consistent, on-time payments. They’ll also want you to have steady employment and verifiable income. Does this apply to your financial scenario? If it does, are you willing to risk your high-credit status to co-sign the loan?
  • The long-term rewards 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. 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.

Co-signer vs. co-borrower

There are two types of parties that can apply for a loan alongside the primary borrower: a co-signer and a co-borrower. In both situations, all parties are legally responsible for the debt that’s being taken out. The credit scores and financial details of both parties are also considered in the application.

After that, the two roles diverge.

“A co-borrower is a party to the loan in every sense including being entitled to receive loan proceeds,” says Tambor. “Where purchase of property or a vehicle is involved, they are more likely to be joint owners too. The co-signer does not receive any loan proceeds, but is responsible for the debt if the borrower does not pay.”

Co-signers:

  • Have no title or ownership in the property (house, car, etc.).
  • Are legally obligated to repay the loan if the primary signer falls behind.
  • Must have their income, assets, credit score and debt-to-income ratio considered in the loan application. Co-signers are often used to help applicants qualify who wouldn’t otherwise be able to.

Co-borrowers

  • Are on the title or have some claim to the property.
  • Split the repayment obligation equally with the other borrower.
  • Have their income, assets, credit score and debt-to-income ratio considered in the loan application. This may make it easier to qualify for larger loan amounts and more favorable terms.

The bottom line

At the end of the day, it’s important to remember what’s on the line. Though co-signing could improve your credit if the primary borrower stays current on their payments, there are also a number of risks to consider. Not only could co-signing a loan threaten your credit score, but it could also impact your future financial prospects for many years. Make sure you take into account the full scope of your liabilities, risks and rewards before deciding to sign on that dotted line.

FAQ about co-signing rights and responsibilities

Can being a co-signer hurt your credit?

The short answer is yes: Being a co-signer for someone else’s loan can hurt your credit.

“Co-signers should understand that the loan will show on their credit reports and they are legally responsible for payment,” says Mike Boyle, vice president of loan operations at Freedom Financial Network. “In addition, if the co-signer wants to apply for a loan on his or her own — whether a mortgage, vehicle, personal or something else — that outstanding debt could have ramifications for the application.”

Can a co-signer get out of a loan?

Yes, it is possible to get out of a loan if the primary borrower agrees to a co-signer release. All lenders have different criteria for co-signer release, but in general, the borrower will have to demonstrate that they have the credit or repayment history needed to qualify for the loan on their own.

Can I remove a co-signer without refinancing?

It is possible to remove a co-signer without refinancing. However, in most cases, the lender will likely require the borrower to refinance the loan anyway. This is because it’s unlikely that the borrower would qualify for the same rate and terms without the co-signer, says Marlowe.

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