What Happens to a Co-Signer if You Can't Pay a Loan?
Lenders are often not willing to risk lending to an individual who has a poor credit history or no credit history at all. In these cases, the lender requires that the borrower have a co-signer, which is someone who signs the loan agreements. The lender then uses the co-signer's creditworthiness to evaluate the application. If the borrower does not repay the loan, the co-signer faces significant consequences.
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Repay Debt
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If the primary borrower does not repay the loan, the co-signer is held legally responsible to repay the debt. As soon as the primary borrower misses a payment, the lender can contact the co-signer and require payment, even before pursuing the primary borrower. The co-signer can be held responsible for the full repayment of the loan. If the co-signer fails to pay, the lender can take her to court and seize wages or property for repayment of the debt.
Credit Score Damage
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The loan appears on both the primary borrower's credit report and the co-signer's credit report. Therefore, if the primary borrower misses a payment, the co-signer's credit report will show a missed payment. Co-signing a loan can cause significant damage to the co-signer's credit score. This is especially relevant when the co-signer wants to apply for credit on his own. He might get denied credit or have to pay higher interest rates because of the missed payments and extra debt obligation on his credit report.
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Relational Damage
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When a co-signer is forced to pay a loan in place of the borrower, this can generate relational animosity. Given that the co-signer was willing to sign the loan documents, it is likely that she and the borrower had a good relationship or were close family. This good relationship is suddenly on the line when the co-signer has to pay off a debt for money she never borrowed.
Considerations
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If someone has asked you to co-sign on a loan, carefully consider the consequences before signing the agreement. If you cannot afford to repay the debt, do not co-sign. Even if you believe the primary borrower will repay the debt, people often experience unexpected hardship due to medical problems or unemployment. If the borrower files bankruptcy, loans with co-signers are not included and you are still responsible for that debt. If you still want to co-sign, the Federal Trade Commission recommends adding a clause to the agreement that only obligates you to pay the principal balance, not late fees or other costs. You can also require that the lender notify you whenever the borrower misses a payment. Otherwise, you might not hear about the missed payments until they have significantly damaged your credit.
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