What Happens If a Cosigner Does Not Pay?
Understand the financial and credit repercussions for all involved when a cosigner defaults on a loan.
Cosigning a loan represents a significant financial commitment, often undertaken to assist a friend or family member in securing financing they might not otherwise obtain. This act means accepting legal responsibility for the debt. When you cosign, you agree to be equally responsible for the loan payments if the primary borrower is unable to fulfill their obligations. This arrangement reduces the lender’s risk, but it also means that any missed payments or defaults can lead to serious consequences for you as the cosigner.
Cosigner’s Direct Consequences
When a primary borrower fails to make payments on a cosigned loan, the cosigner becomes directly and equally responsible for the debt. Lenders consider cosigners to have “joint and several liability,” meaning they can pursue either party for the full outstanding balance. The lender will contact the cosigner directly once payments are missed, typically through demand letters and phone calls.
The expectation is for the cosigner to cover any missed payments, late fees, or even the entire outstanding loan balance. If the cosigner also fails to make these payments, the lender can escalate collection efforts, which may include legal action. The cosigner’s personal assets, such as savings or other property, could be at risk to satisfy the debt. This direct financial burden can arise quickly.
Primary Borrower’s Financial Impact
Even with a cosigner on the loan, the primary borrower remains fully responsible for the debt. The lender will continue collection efforts against the primary borrower, maintaining pressure through calls and formal notices.
This situation can force the primary borrower to make payments they struggle to afford, potentially leading to personal financial strain. The initial default, coupled with the cosigner’s non-payment, can trap the primary borrower in a cycle of escalating debt. They might face the difficult choice of depleting savings or defaulting on other financial obligations to prevent further damage. The primary borrower’s credit will also suffer significantly from the initial default.
Lender’s Collection Actions
Lenders employ a structured approach to recover defaulted loans, targeting both the primary borrower and the cosigner. Initially, this involves escalating communication, such as phone calls and formal letters of default, demanding payment of the overdue amounts. These notices often include an acceleration clause, allowing the lender to demand the entire remaining balance immediately.
If these initial efforts are unsuccessful, the lender may engage an internal collections department or sell the debt to a third-party collection agency. These agencies will pursue the debt, often through persistent communication. Ultimately, if the debt remains unpaid, the lender or collection agency can pursue legal action, filing a lawsuit to obtain a judgment against one or both parties.
A judgment is a court order formally declaring that a debt is owed and can grant the creditor powerful collection tools. These tools may include wage garnishment, where a portion of the debtor’s earnings is legally withheld by their employer and sent directly to the creditor. Another action is a bank levy, which allows the seizure of funds directly from the debtor’s bank accounts. Additionally, a judgment can lead to a property lien, a legal claim against real estate or other assets, which can prevent the sale or transfer of property until the debt is satisfied.
Credit Reporting Effects
Non-payment of a cosigned loan, whether by the primary borrower or the cosigner, significantly impacts the credit reports and scores of both individuals. Loan defaults, missed payments, and collection accounts are reported to major credit bureaus.
The appearance of these derogatory marks can cause a substantial drop in credit scores, making it difficult to obtain new credit, loans, or even secure housing in the future. These negative marks typically remain on credit reports for seven years from the date of the first missed payment. Even if the debt is eventually paid, the record of the default will persist for this period, affecting future financial opportunities.