Do Cosigners Have to Pay If the Borrower Doesn’t?

Cosigning a loan can help someone secure financing they might not otherwise obtain, such as a car loan, student loan, or mortgage. A cosigner agrees to be responsible for another person’s debt. The cosigner’s creditworthiness is evaluated alongside the primary borrower’s during the loan application process.

Understanding Cosigner Obligations

When an individual cosigns a loan, they undertake a legal and financial commitment known as “joint and several liability.” This means the cosigner is equally responsible for the entire debt as the primary borrower. The creditor can pursue payment from either the primary borrower or the cosigner for the full amount owed. This responsibility extends to the loan’s principal, interest, and any associated fees like late charges or collection costs.

Before signing, a potential cosigner needs to understand the loan agreement. This includes reviewing the full loan amount, the interest rate, and the repayment terms, which detail the schedule and amount of each payment. It is also important to understand the specific default clauses, which outline the conditions under which the loan is considered delinquent or in default. Cosigners typically gain no ownership rights to any property purchased with the loan funds.

When a Cosigner Becomes Responsible

A cosigner’s obligation to make payments is typically activated when the primary borrower defaults on scheduled loan payments, such as missing payments or stopping them entirely.

Lenders typically attempt to communicate with the primary borrower regarding missed payments before contacting the cosigner. Many loan agreements include grace periods, allowing a few days after the due date before a payment is officially considered late. If the primary borrower does not remedy the delinquency, the lender will then contact the cosigner, informing them that payments are due. The cosigner’s responsibility to pay is required once these triggers occur.

Impact of Cosigner Non-Payment

If a cosigner fails to fulfill their payment obligation, there are direct financial and credit-related consequences. Missed or late payments by either the primary borrower or the cosigner are reported to credit bureaus, significantly impacting the cosigner’s credit score. These negative marks can remain on a credit report for up to seven years, potentially lowering the cosigner’s credit score and affecting their ability to secure future credit.

Lenders will initiate collection efforts, which may include phone calls and letters to both the borrower and the cosigner. If the debt remains unpaid, the lender may engage collection agencies to recover the outstanding amount. Ultimately, legal action can be taken against the cosigner to recover the debt. This can lead to court costs, and if a judgment is obtained, potential wage garnishment or seizure of assets to satisfy the debt, depending on legal processes.