The Facts About Borrowing With a Co-Signer
If a friend or family member asks you to cosign a loan, you may be tempted to grant the favor without thinking too deeply about it. Perhaps you’ve taken out loans with co-signers before yourself—you figure, why not pay it forward? Sign on the dotted line and let the main borrower take it from there.
Not so fast. Many people don’t realize the true implications of co-signing a loan. By putting your name on a loan with someone else, you take on all the risks of the loan. As the co-signer on a car loan, for example, you share full responsibility for making sure the loan is paid on time every month. Also: did you know that if a person passes away before debt is paid off, surviving co-signers in some cases may become responsible for paying the debt in full?
Ahead, some facts about co-signing everyone should know.
Fact: Loan defaults are surprisingly common.
In most cases, when a borrower fails to make several payments on a loan, that’s called default. And it happens frequently and for a multitude of reasons.
Indeed, loan defaults are increasingly common. Globally, household debt is at an all-time high of $47 trillion. One example of why that matters: Nearly 45 million Americans currently have student loan debt that, in total, amounts to $1.56 trillion. By 2023, 40% of student loan borrowers may default, according to Brookings Institution research. Even with the best of intentions, there’s no guarantee that default can’t happen, especially when debt loads are high.
This is of course important to understand before you co-sign for someone else’s debt. By co-signing, you are linking the primary borrower’s financial behavior with your own. So if that person is late with payments or defaults on the loan, your credit score will drop. But it matters a lot if you’re the primary borrower, as well. This means you’re responsible not just for your own credit and financial situation, but your loved ones’ also.
Fact: If the primary borrower defaults, co-signers will be 100% responsible for repayment.
It’s worth remembering that by co-signing, you are accepting responsibility if the primary borrower stops paying. If that happens, “the debt issuer will go to the co-signer to pay for the loan,” says Bryan Bibbo, lead advisor with The JL Smith Group in Avon, Ohio. “The co-signer is 100% responsible for any loans they sign on.”
By the same token, if the loan goes into default, the lender is likely to assume that the primary borrower is unable to pay and may then decide to pursue the co-signer instead.
Fact: If the primary borrower dies before repaying the loan, the co-signer may be responsible.
Default isn’t the only way you can get saddled with the payments for a loan you cosigned. If the primary borrower passes away, the remaining debt typically shifts to the co-signer.
When a person dies without assets to cover outstanding debt, a lender generally takes the collateral securing the loan (such as a house for a mortgage or a car for a car loan) to recoup losses. But if there’s a co-signer, the debt could simply become that person’s responsibility.
In the U.S., federal student loans are forgiven upon the death of the borrower, but private student loans generally are not. They become fully payable upon the borrower’s death. This is why, if you have debt with co-signers, it can be a good idea to have enough life insurance coverage to cover any debt you might leave behind.
While many people have life insurance coverage through their employer, workplace group insurance is often not enough to cover the full amount of expenses, including debts, experts say. An individual policy that you buy on your own can supplement coverage provided by your employer. It’s also “portable,” meaning it still covers you if you leave your job. Depending on the policy, it may even support other financial goals as well. (For example a permanent life insurance policy, like a universal life or whole life policy, may also help you plan for your children’s education or support your retirement goals. Be sure to investigate all your options.)
Fact: You can’t always remove co-signers from a loan.
What if you’ve co-signed a loan and wish to be removed? “A common way to get a co-signer off a loan is to have the original debtor refinance the loan on their own through a different lender,” Bibbo says. “Certain lenders will also allow a co-signer release—but not every company authorizes this.”
This is why it can be a good idea to ask the lender before you co-sign whether you’ll be able to remove yourself from the loan at a later date. If you are already a co-signer on a loan, be sure to keep regular tabs on the loan or credit card account to make sure payments are on time and up to date. If there’s a problem, work it out immediately with the primary borrower before any damage can be done to either of your credit scores.
ARTICLE REFERENCES
- Interview with Bryan Bibbo.
- Friedman, Z. (2020, February 3). Student loan debt statistics in 2020: A record $1.6 trillion. Forbes.
- A global consumer default wave is just getting started. (2020, March 30). Bloomberg.
- Just released: Auto loans in high gear. (2019, February 12). Federal Reserve Bank of New York, Liberty Street Economics.
- Quarterly report on household debt and credit. (2019, February). Federal Reserve Bank of New York, Center for Microeconomic Data.
- Scott-Clayton, J. (2018, January 11). The looming student loan default crisis is worse than we thought. Brookings.