How Does a Co-Signed Agreement Work?

1. When people co-signs for loans, they obligate themselves to pay for money borrowed in the event that the primary borrower does not pay. Loan co-signing is often required of people with bad credit in order to provide lenders with an assurance that the loan will be paid back. College students and others with limited credit history or income (but with high expenses) are likely to need a co-signer to secure a loan.
2. While loan co-signing can aid those with a bad or limited credit history secure a loan, it is not something that should be done lightly. Co-signing for a loan makes one liable for the entire sum of the loaned amount, and can also negatively affect credit. Usually if the borrower misses a payment, the lender can immediately bill the co-signer instead of trying to collect from the borrower. Also, co-signers are usually well-meaning family members or friends of loan applicants, and personal connections often override practical concerns when considering co-signing a loan, forcing co-signers to back people that they may feel obligated to help even though they might not know anything about the borrower's financial situation. If the borrower fails to pay, the loan can create resentment between the co-signer and the borrower.
3. When considering co-signing, it is important to find out as much information as possible about the loan and the borrower's financial situation. They should have a plan for paying the loan back, and show the co-signer all the other debt they have. The co-signer should request monthly statements from the lender, and make sure that they have enough money to pay for the loan in the event that the borrower does not pay. Ideally, if the borrower is able to consolidate the loan with other debts in the future, the co-signer's liability for the debt can be dissolved.

Resources

• FTC article on co-signing for loans.