What Happens If You Don’t Pay Back a Cosigned Loan?
Learn the serious financial and credit repercussions for both parties when a cosigned loan goes unpaid.
A cosigned loan involves a primary borrower and a cosigner, both legally responsible for the debt. This arrangement often helps the primary borrower secure financing they might not otherwise qualify for, typically due to a limited credit history or lower income. The cosigner assumes equal legal responsibility for repayment. Should the primary borrower fail to make payments, the obligations and consequences fall directly upon both individuals.
Initial Financial Repercussions
When a payment on a cosigned loan is missed, immediate financial repercussions begin for both the primary borrower and the cosigner. Lenders typically assess late fees, which are added to the outstanding balance, increasing the total amount owed by both parties.
Many loan agreements include clauses that permit an increase in the interest rate if the loan becomes delinquent, known as a default interest rate. This higher rate significantly increases the cost of borrowing. The immediate impact on credit scores is also significant, as missed payments are typically reported to credit bureaus once they are 30 days past due. This negative mark affects the credit reports and scores of both the primary borrower and the cosigner.
Lenders will initiate communication with both parties shortly after a payment is missed, through calls, emails, and written notices. These communications serve as formal notifications of the delinquency and remind both of their joint obligation. The loan’s status quickly shifts from “current” to “delinquent.” If the situation is not rectified, the loan may eventually be classified as “defaulted,” a more severe status that triggers further collection efforts and potential legal action.
Collection and Legal Actions
As a cosigned loan remains unpaid, lenders intensify their collection efforts, targeting both the primary borrower and the cosigner. This typically involves persistent phone calls, emails, and formal letters demanding payment. Lenders may also engage third-party collection agencies, which are authorized to pursue the debt on their behalf, further increasing the pressure on both responsible parties.
If collection efforts are unsuccessful, the lender may “charge off” the loan, usually after it has been delinquent for 120 to 180 days. A charge-off signifies that the lender considers the debt uncollectible, removing it from their active accounts but not forgiving the debt. This action is reported to credit bureaus, severely damaging the credit profiles of both the primary borrower and the cosigner.
Lenders possess the legal right to file a lawsuit against either or both the primary borrower and the cosigner to obtain a judgment for the outstanding debt. This legal action can result in a court order requiring payment, which can then be enforced through various post-judgment collection methods. The lender may choose to pursue the party with the most accessible assets or income, meaning the cosigner is equally vulnerable to legal proceedings as the primary borrower.
Should a judgment be obtained, creditors can pursue methods such as wage garnishment, where a portion of an individual’s earnings is directly withheld by their employer and sent to the creditor. They may also pursue bank account levies, allowing them to seize funds directly from checking or savings accounts. Additionally, a property lien could be placed on real estate owned by either party, potentially forcing its sale to satisfy the debt. All these severe actions are reported to credit bureaus.
Credit Report and Future Borrowing Impact
The long-term ramifications of a defaulted cosigned loan profoundly affect the credit reports and future financial opportunities of both the primary borrower and the cosigner. Negative entries, such as a default, charge-off, or judgment, typically remain on credit reports for approximately seven years from the date of the original delinquency. Bankruptcies, if they arise from such debt, can stay on reports for up to ten years, creating a prolonged barrier to financial health.
This significant credit damage makes it substantially more difficult for both individuals to obtain new credit in the future. Securing essential loans like mortgages, auto loans, or even basic credit cards becomes challenging, as lenders view them as high-risk borrowers. Even if credit is extended, it will likely come with significantly higher interest rates and less favorable terms, reflecting the increased risk perceived by lenders. This means any future borrowing will be considerably more expensive.
Beyond traditional lending, a poor credit history can affect various other financial aspects of life. Insurance premiums, particularly for auto and home policies, may increase, as some insurers use credit-based insurance scores to assess risk. Utility companies might demand larger security deposits for services like electricity or gas, and obtaining favorable terms on cell phone contracts could also become difficult. The broad impact extends to housing, as landlords often check credit reports when evaluating rental applications.
The cosigner, in particular, faces a unique vulnerability because their credit is negatively affected solely due to the primary borrower’s default, even if the cosigner never missed a payment themselves. Their financial reputation and future borrowing capacity are directly tied to the primary borrower’s actions. This underscores the profound and lasting consequences for both parties involved in a cosigned loan that goes unpaid.