What Happens If You Don’t Pay Back a Cosigned Loan on Time?

When a loan is cosigned, it involves a primary borrower and a cosigner. This arrangement often helps the primary borrower qualify for a loan they might not otherwise obtain due to credit history or income. Cosigning creates a shared financial obligation with significant implications if payments are not made as agreed. Failure to repay a cosigned loan can lead to serious financial and legal repercussions. This article explores the consequences when a cosigned loan falls behind on its payment schedule.

Understanding Shared Liability

A cosigned loan establishes joint and several liability, meaning both the primary borrower and the cosigner are equally responsible for the entire debt. This means the lender can pursue either party for the full amount owed. Even if the primary borrower is expected to make the payments, the cosigner is legally bound to step in if the primary borrower fails to do so.

Missing even a single payment can have immediate financial impact. Lenders apply late fees, increasing the total debt. A missed payment, usually after 30 days, is reported to credit bureaus. This negatively affects the credit reports of both the primary borrower and the cosigner.

This can cause a drop in credit scores for both. While a single late payment might seem minor, it marks the beginning of credit damage. Lenders send notifications regarding overdue payments, reminding both parties of their obligation. This emphasizes the shared financial responsibility and direct consequences of non-payment on credit standing.

Loan Delinquency and Lender Responses

As missed payments accumulate, a loan becomes delinquent, typically after 30 days, and can then transition to default. Lenders initiate escalating collection activities to recover the debt. Initially, this involves increased communication (phone calls, letters, emails) reminding borrowers of the overdue amount and fees. These communications aim to prompt payment before the situation worsens.

If payments remain unmade, the lender’s collections department intensifies efforts, sometimes offering repayment plans or modifications. For secured loans, like auto loans, the lender retains a right to the collateral. If payments are not current, the lender can repossess the asset (e.g., a vehicle) to recover losses. This can occur with little warning.

If the debt remains unpaid, typically after 120 to 180 days, the lender may declare the loan a “charge-off.” A charge-off means the lender has written off the debt as unlikely to be collected, but it is still legally owed by both the primary borrower and the cosigner. After a charge-off, the lender may sell the debt to a third-party collection agency, which will pursue payment.

Damage to Credit Standing

Failure to pay a cosigned loan has lasting repercussions on the credit standing of both the primary borrower and the cosigner. Every missed payment, usually reported after 30 days, appears as a negative mark on credit reports. These late payment notations can remain on a credit report for up to seven years from the original delinquency date. The impact’s severity increases with delinquency length; a 90-day late payment affects credit scores more significantly than a 30-day late payment.

If the account is sent to collections or charged off, these events also become prominent negative entries on credit reports. A collection account can stay on a credit report for up to seven years from the first missed payment that led to the collection. Similarly, a charge-off remains on a credit report for up to seven years from the first missed payment that led to the charge-off. These marks signal a history of financial mismanagement to future lenders.

For secured loans, a repossession also severely impacts credit. A repossession record can remain on a credit report for up to seven years from the first missed payment that triggered it. These negative entries significantly lower credit scores, making it difficult to obtain new credit (e.g., loans or credit cards) or secure favorable interest rates. A damaged credit history can also affect housing applications or employment opportunities, as credit checks are often part of background screenings.

Legal and Financial Enforcement

If a cosigned loan remains unpaid, lenders may pursue legal action against both the primary borrower and the cosigner. The legal process typically begins with a civil lawsuit filed by the lender to obtain a judgment for the outstanding debt. Both parties to the loan can be named in the lawsuit, and a judgment, if granted, legally confirms the debt and the amount owed. It is important to note that a lender may choose to sue either the primary borrower or the cosigner, or both, to recover the debt.

Once a court judgment is obtained, the lender, now a judgment creditor, has various legal mechanisms to enforce the collection of the debt. One common method is wage garnishment, where a portion of the debtor’s earnings is directly withheld by their employer and sent to the creditor. Another enforcement tool is a bank account levy, which allows the creditor to freeze funds in the debtor’s bank account and seize money to satisfy the judgment. A bank levy can occur multiple times until the full debt is satisfied.

Additionally, creditors may place a lien on the debtor’s property, such as real estate. A property lien serves as a legal claim against the asset, which can prevent the property from being sold or refinanced until the debt is paid. These enforcement actions can be taken against either the primary borrower or the cosigner, or both, depending on who has assets or income that can be legally accessed. These measures represent the most severe financial consequences of failing to meet the obligations of a cosigned loan.