Cosigning A Loan

What Does “Cosigning” A Loan Mean?


Someone needs to make a big purchase and they need a loan. Unfortunately, their credit may not be up to snuff and need a co-signer. Perhaps you are taking an adventure with a partner and two signatures are required. What does being a co-signer really mean? What is cosigning a loan?

Before You Sign

Being a Cosigner and Cosigning a Loan
If you have been asked or need to be a cosigner for a loan, there is a lot to consider before signing your name on the bottom line. Who is the other individual(s) on the loan, are they trustworthy, what are the terms of the loan and how much is being borrowed are just a few things to think about. There are some lenders who help make the decision process easy as they will provide you a Co-signer’s Notice.

This is a form which lays out your responsibilities towards the loan if you were to sign which actually is very helpful in providing important information. The notice will advise you that, as a co-signer, you are being asked to guarantee the debt that is being obtained. Depending upon the terms, you may have to pay the loan in full if asked and/or pay additional fees that may incur. You may also be advised within the notice that the creditor can collect from you first before the primary requestor on the loan.

Keep in mind that this notice is just that, a notification. It does not make you liable and in some states, the notice may not be even offered. Be sure to know what your local laws are in regards to collecting a debt. What else should you consider?

  • Can you make the loan payments or pay it off if required?
  • Having your name on the loan could affect your getting credit/loan elsewhere.
  • Pledge only those items you are willing to lose if the borrower defaults on the loan.
  • Have the terms of the loan adjusted to allow you time, if the borrower defaults on the loan, to make a necessary payment or to obtain funds to pay off the loan (if required).
  • If possible, ask the creditor for how much you would be liable for if the loan payments can no longer be made.
  • Obtain copies of all documents associated with the loan.

Minimizing Your Risk as a Cosigner

Is this even possible to do? Well, yes and no. Reducing your financial risk can be done by ensuring that you trust the other party. Be sure that they continue to have income to make the appropriate payments. Follow up and be sure that payments are made in full and in a timely matter.

Can you guarantee that you won’t have any risk? No you can’t because the act of borrowing money one doesn’t have is a risk in itself. But by asking questions, having terms to protect you as part of the loan agreement and tracking payments being made will certainly help.

It is important to remember, that what the primary borrower does or doesn’t do will have some impact on you and your credit. By ensuring that the primary borrower isn’t borrowing more than necessary, you are aware of the terms and can pay the loan if necessary then you should be okay. Cosigning a loan is not a small decision, but it can be a big deal to the one you are co-signing for.

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