Co Signers Put Themselves in Creditor’s Spotlight

Cathy Moran, Esq., (Redwood City, CA)

The responsibility of a co-signer is one of the single most common misunderstandings about law.

Put bluntly, a co-signer is just as responsible for the debt as the primary borrower.

Co sign someone else’s loan and you put yourself in the creditor’s spotlight.

That should make the hair on the back of your neck stand up.

Co-signer not just a reserve player

Too many people think that their role as a co-signer kicks into action only if the creditor can’t manage to collect from the original borrower.

Not so.

There is no ranking of the legal obligation.  The co-signer’s obligation is exactly the same as the borrowers.  The creditor doesn’t even have to try to collect from the other person before looking to you to pay up!

Why is a cosigner needed

When you are asked to co-sign for someone, think about WHY a co-signer is needed.

The lender is worried that the original borrower* won’t pay as promised.  It’s a high risk loan for the creditor** from the very beginning.

You’re being asked to guarantee that the loan will be paid.  So the creditor has you on the hook as well.  You’ve become the creditor’s insurance.

For all the best intentions of the person who asked you to help them out, life happens.  If the original borrower loses a job, gets sick, files bankruptcy, or even dies, the debt is yours – no questions asked!

Credit report

Your credit report is at risk of taking a hit if the other person doesn’t pay on time, even if you don’t end up having to pay the debt.

Saying no is hard

For all the logical reasons that taking on someone else’s debt is a bad idea, it’s not easy to say no.

After all, the people who will ask you to co-sign a loan are people you’re close to.  Family.  Dear friends.  Those in trouble.

Co signing seems innocent and cost free, because the person asking expects to pay as agreed.

If they see your signature as a mere formality, you look as if you aren’t a real friend if you decline.

Student loans

Though the law may change, under today’s law, student loans are forever.  Federal loans have no statute of limitations; they live on until they’re paid.

They can’t be forgiven in bankruptcy, whether you’re the student or the co signer.

Private student loans have no provisions for deferments which allow you to postpone payment, discounts, hardship discharges, or payment extensions.

Limiting your exposure to a large debt is tough at the personal level, especially when the student asking for the co-signature is often a child or grandchild. 

Evaluating your risk

So, what do you do when asked to co-sign a loan.  Nancy Reagan would advise:  just say no.

But it may not be that easy.

I suggest you consider

• the amount of debt you’re assuming
• your age
• the purpose of the loan

Consider how having to actually repay the loan would impact your financial life.

If called on to make the payments, would repayment overlap your expected retirement?

Are you financing a new car or a college education?  Does the person asking you to co-sign really need a new car or will a used car work just as well? 

Whatever your decision, realize that you are financially responsible should anything go wrong.

*Generally, an adult child or other family member or a good friend.

**A car lot, utility company, phone store, furniture store, rent to own – anyone who offers money or merchandise to be repaid over time.