Cosigning Defined (Plus What You Should Know About Doing It)

By Jackie Beck   Updated 09/08/2021 at 6:12 pm

Cosigning is when you agree to be legally responsible for paying someone else’s debt if they don’t. That’s what it means to cosign.

It’s not a character reference or anything. It’s a legal promise to pay if the other person can’t or won’t.

And it’s worse than being a joint applicant, because when you cosign you have no right to whatever they borrowed the money for. Being jointly on a loan is something different.

Is It Risky to Cosign?

Yes.

Especially if it’s for someone with bad or poor credit.

As a cosigner, you are taking on a big risk. If the person doesn’t pay as agreed, it will show up on your credit AND the lender will go after you. That’s because by cosigning you agree to pay if the borrower doesn’t.

So if you’re thinking of cosigning for someone, make sure you would be happy if things go south.

If you have even a little bit of doubt about it, don’t cosign.

Why Would Someone Need a Cosigner?

Someone might need a cosigner to borrow money if they have bad, poor, or little to no credit. (No credit is not the same as bad credit.)

But what it really means is that they need a cosigner because the bank or other lender does not believe they are a good credit risk.

In other words, the lender thinks there is a very good chance they will not pay as agreed or at all.

Lenders use all kinds of credit scoring models to figure that stuff out, and chances are they are right to require a cosigner.

The person who wants you to cosign might pay on time and in full. (Especially if they are just starting out, have a good job, don’t get laid off, and are otherwise really responsible.)

But chances are HIGH that they won’t. Especially if they have bad credit. If they don’t, you’ll get to experience the downsides of cosigning first hand.

What Are the Downsides of Cosigning?

There are many downsides to being a cosigner. If you cosign for someone, you need to be 100% ok with the things that will happen:

  • having a higher debt to income ratio
  • making it harder for you to borrow if you want to (for example, making it harder to buy or lease a house)

And the things that could very easily happen:

  • suddenly having to pay for something you get no benefit from
  • having your credit ruined because of late payments, defaults, or a repossession
  • in some states, the creditor can even collect the debt from you without first trying to collect from the person you cosigned for
  • being sent to collections
  • being sued
  • maybe having your wages garnished
  • having a relationship ruined

Are There Any Benefits to Cosigning?

There are rarely any benefits to being a cosigner. You are taking all of the risk with little to no reward.

At best — if the person you are cosigning for is a unicorn who makes every payment on time and in full, and the loan they took out changes your mix of credit, there might be a tiny benefit.

In that case, the only benefit might be that you have a wider credit mix which may have a small positive impact on your credit score.

But if you’re cosigning for someone and you get approved, you already have a good credit score of likely 670 or higher. And unicorns are rare.

Cosigning Is Not a Way to Improve Your Credit

People sometimes wonder if it goes on your credit if you cosign. There’s no big “cosigner!” label that goes on your credit.

But if the person you’re cosigning for pays late or not at all, that definitely goes on your credit.

In short, cosigning is not a way to build your credit. It’s a way for someone who can’t qualify to borrow on their own to borrow money anyway. So cosigning is often a bad idea.

How to Say No to Cosigning

Remember that no is a complete sentence. It’s natural to not want to offend someone, but remember that they felt free to ask you to put your hard earned money at risk.

“No, sorry but I can’t” is perfectly fine to say. If they press you on WHY, press them right back with “well, why do you need a cosigner?”. Or better yet, be a broken record. Repeat “I just can’t” or “I just can’t swing it” as your answer.

(Here’s a whole list of ways to say no when saying no is hard to do.)

It is not your job to enable someone to borrow money. I know that sometimes it’s culturally expected to help people out that aren’t doing as well as you. But that doesn’t mean helping people out at the expense of taking care of your future.

You can say you love them but you don’t believe in borrowing or lending money like that. And you can help them out in other ways.

Alternatives to Cosigning for a Loan

As the person asking someone to cosign, consider whether you can find a way to live without it until your situation improves. Or look at these alternatives to loans.

As someone who is asked to cosign, again the biggest and usually smartest alternative is to say no. But you may be able to help in other ways. You might offer to show them what you did to get in good financial shape, point out community resources, or suggest other ways to reach their goal.

Or if you really want to help them get that exact thing now and can afford to pay for it, you could give them it as a gift.

If the idea of giving a huge gift like that feels uncomfortable, remember that it’s exactly what you’re essentially agreeing to do by cosigning.

If You Really Want to Cosign For Someone…

There are all kinds of things you can cosign for, if you really want to do it. That includes:

  • Leases
  • Student loans
  • Co-signing for a car
  • Credit cards
  • A mortgage
  • Etc.

You’ll need to have good credit. You should also make sure you’re able to afford the loan entirely on your own.

To cosign, you have to first be given what’s called a cosign notice. It’s required by the Credit Practices Rule. A cosign notice warns you about what the impact of being a cosigner is.

That notice must say the following:

Notice to Cosigner
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for the debt.

Then you’ll sign paperwork where you agree to be the cosigner and to pay if the other person doesn’t.

You can cosign for a friend, relative, significant other, etc. as long as you have good credit. But while funny, this meme is not your purpose:

If you're in a relationship, one of you better have good credit. That's why it's called significant other (sign-if-I can't)

Remember that the person you are thinking of cosigning for may not always be in your life. Especially if they end up dragging you through the mud money-wise. (Even if they have the best of intentions!)

Finally, if you do cosign, make sure to ask the creditor to agree in writing to tell you if there are any missed payments. You don’t want to be surprised down the road.

Can You Be Removed as a Cosigner Later?

Sometimes, but it’s hard to do.

There are several reasons you may want to be removed as a co-signer. For example, they may not want that debt to count as part of their debt-to-income ratio, you may no longer want to be one of the responsible parties, you may be part of a couple getting a divorce. Or worse, you might be sick of the other person not paying their loan.

The trouble is, it’s much easier to cosign for someone than it is to be removed as a co-signer.

Your best bet is to get the person you cosigned for to refinance the balance, pay off the loan, and close the account.

Usually this means the person would have to no longer need a cosigner in the first place, or find someone else to go cosign for them on a new loan.

In the case of a credit card with no balance, sometimes the credit card company may be willing to close it and reopen one in only the other person’s name instead. But they would need to qualify on their own.

Key Takeaways

Cosigning puts you on the hook for the ENTIRE amount owed. Never cosign for anything you wouldn’t be fine with paying in full yourself. The internet is full of stories from people who regret cosigning. Make sure you won’t regret your decision.

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