Becoming a cosigner on a loan is a major responsibility. Cosigners are completely liable for the loan if the primary borrower fails to make payments as agreed. If necessary, lenders will file civil lawsuits against cosigners to collect on a debt that's past due.
Lenders require a cosigner when a loan applicant has poor credit or little credit history. Typical examples include a parent cosigning for an adult child’s first new car, or a sister guaranteeing a signature loan for a sibling. The lender makes it clear, in some instances, that approval is not possible without a cosigner. That encourages the prospective borrower to find someone willing to help.
Most lenders require cosigners to have outstanding credit to be approved. FICO credit scores range from 300 to 850, and lenders prefer that cosigners have scores of 720 or higher. Scores in that range are high enough to obtain most loans, according to the Credit Repair website. However, each lender has its own standards for approval for borrowers and cosigners, and many factors can come into play, including income and credit history.
Cosigning has the potential to ruin outstanding credit, even for someone with a long credit history who has never missed a loan payment. Bankrate reported the case of a woman with superb credit who cosigned for a co-worker on an automobile loan -- and the co-worker missed five of the first 10 payments. Each late payment appeared on the cosigner's credit report, causing her credit score to drop significantly. The bank called the woman to tell her it was about to repossess the car and that she would assume responsibility for the loan as the cosigner. The woman tracked down the car -- and the primary borrower -- in another state and took possession of the car. However, that still left her with the payments and the balance on the loan as well as the damage to her credit score.
Some cosigners file for bankruptcy because of bad loans. That can happen on a car loan when the bank repossesses the vehicle, sells it at auction and holds the cosigner responsible for any balance left on the loan. It is common for cars to be worth less than the balance on the loan – a circumstance known as being “upside down.” A car with, say, a $15,000 loan balance may sell for only $7,000 at auction, leaving an $8,000 balance. If the cosigner refuses to pay the balance, the lender can file a lawsuit seeking a deficiency judgment for the entire amount. Judgments can lead to bank or wage garnishment, and some cosigners file for bankruptcy because they can't afford the debt.
People should avoid cosigning if possible, especially for friends, co-workers or acquaintances. Even after signing for a family member, the cosigner should monitor payments on the loan and check with the borrower every six months or so about the possibility of refinancing the loan into a new loan in the borrower’s name only.