A co-signer of a loan is an individual who agrees to assume liability should the individual taking out the loan not make the required payments. Co-signers are sometimes called “guarantors” because they guarantee that a loan will be paid. Co-signers have a legal liability for the loan, but this liability only arises after loan payments are not made and the loan becomes overdue. At this point, the co-signer will be called upon to make the loan payments. When an individual agrees to co-sign a loan, moreover, he or she is assuming a legal liability that will be recorded on the co-signer’s credit history.
The types of loans usually involving co-signers include mortgages, credit cards and personal loans, such as for an automobile or a small business loan. Co-signers are typically required when the individual requesting the loan has a poor credit history or not enough assets to secure the total amount of the loan. Any time the loan originator, such as a bank, does not feel that granting the loan to the requesting individual would be a wise investment they may request a co-signer. Some banks may require two co-signers, should the first co-signor’s credit and assets be insufficient.
Prior to agreeing to co-sign a loan the co-signer should consider the reliability of the individual requesting the assistance. If the requester is reliable, responsible and merely trying to increase his credit score or obtain funding that you believe will be put to good use, it may be a good idea to co-sign a loan. If the individual requesting the loan does not have these characteristics, though, chances are quite high that loan payments will not be made and that the co-signer will need to make payments. Studies show that the majority of co-signers end up paying a portion or all of a loan.
To protect themselves, a co-signer should ensure that the loan document clearly identifies him only as a co-signer. This identification may enable the co-signor to reduce the amount of liability he or she has for the loan should it ever be brought to court for default. Additionally, a co-signer may also be permitted access to loan documents and therefore be able to periodically check to ensure that the loan is being timely paid and in good standing. Unfortunately, there is no way for a co-signer to remove their name from a loan other than by the individual taking out the loan’s request or refinancing of the loan. Both of these options, however, are dependent upon the loan orignator’s approval.
Co-signing a loan is a financial responsibility; agreeing to co-sign a loan makes the co-signer liable for the full amount of the loan should the person taking out the loan fail to make the required payments. Prior to agreeing to co-sign a loan, the potential co-signer should consider the personality and responsibility of the individual requesting assistance. If you want to learn more about co-signing a loan, visit the sites below.
- 360o of Financial Literacy: Organization of public accountants providing general information on loans.
- The Federal Reserve: Federal agency’s information about the basics of mortgage loans.
- FTC, Dept. of Consumer Protection: List of facts to consider prior to co-signing a loan.
- Credit and Debt Basics: New York State Department of Consumer Affairs’ basic information about credit.
- Small Business Advancement Center: Educational article discussing business loan basics including the “Eight ‘C’s” of credit.
- Federal Trade Commission: Basic information on credit and loans.
- Consumer Credit Division, Consumer Credit: Indiana Department of Financial Security’s information on co-signing a loan, including the likelihood of co-signers needing to pay on the loan.
- Experian Credit Agency: Obligation of signing or co-signing a loan.
- TruCredit by Transunion: The credit reporting agency’s report on the considerations to include prior to agreeing to co-sign a loan.