Short answer: when you cosign a loan, you agree to be responsible for someone else's debt, and you may have to pay up to the full amount if the borrower does not pay (FTC). The lender can report the loan as your debt, and that can keep you from getting credit even if the borrower pays on time (FTC). Sign only if you could afford to pay the whole loan yourself.
The Notice to Cosigner
Under the FTC's Credit Practices Rule, a lender or retail installment seller covered by the rule must not misrepresent a cosigner's liability, and must tell you the nature of that liability before you become obligated. It can do that with a separate document containing only this notice (16 CFR 444.3). What it says, in short:
- If the borrower doesn't pay the debt, you will have to.
- You may have to pay up to the full amount of the debt, plus late fees or collection costs.
- The creditor can collect from you without first trying to collect from the borrower.
- The creditor can use the same collection methods against you as against the borrower, such as suing you or garnishing your wages.
- If the debt is ever in default, that may become part of your credit record.
The notice itself is not the contract that makes you liable (16 CFR 444.3(c)). Read the loan contract too.
What cosigning can do to your own borrowing
Example, not a quote: you cosign a $10,000.00 loan at 15% for 48 months. The payment is $278.31 a month, $13,358.88 in total of payments, and that total is the scale of what you could be asked to pay, before any late fees. Debt-to-income ratio is your monthly debt payments divided by your gross monthly income (CFPB). With $5,000.00 a month in income and $900.00 in your own debt payments, your ratio is 18.0%. If a lender counts the cosigned payment as your debt, it becomes $1,178.31 / $5,000.00 = 23.6%. More on the ratio: debt-to-income ratio for a personal loan.
Before you cosign
- Ask the lender to send you the monthly statements, or to agree in writing to tell you if the borrower misses a payment (FTC).
- Get copies of all the important papers (FTC).
- Know how you would get off the loan: the lender and the main borrower must both agree to remove you (FTC).
- Read the disclosure for the APR, total of payments and fees, since that is the debt you are backing (how to read a loan disclosure).
- Check your own credit reports later to see how the loan is reported; see check your credit report.
If the borrower stops paying
If the main borrower misses payments or stops paying, you must repay the loan (FTC). Call the lender before the next due date, and see what happens if you miss a loan payment. If a collector contacts you, see debt collector rights on a loan. A cosigner can still owe the loan if the borrower dies (CFPB); see personal loan debt after death.
If you are the one looking for a cosigner, see a bad credit loan without a cosigner for other routes first.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.