A cosigner is a person who guarantees the debt or financial obligations of another person. The cosigner gets all of the responsibility for a debt, but none of the fun. If the borrower gets a new house or car, the cosigner gets nothing but the obligation to cover the borrower's payments or the balance of the loan if the borrower defaults.
If you are asked to be a cosigner, keep this in mind. You are being asked to cosign because a financial professional has determined that the person who is borrowing the money is statistically likely to default. They deem the borrower to be too risky, and will not loan money or extend credit to that borrower without a guarantee that somebody else will be on the hook if the borrower defaults. Basically, agreeing to be a cosigner is always a bad bet.
People agree to cosign for loans and leases because they want to help somebody. Very often, that somebody is their child, who needs a cosigner for a student loan, a lease, or a car purchase. Sometimes it is another relative, or their child's partner. Helping people is a virtue but, when there may be a very large price tag attached, it's a virtue that should be exercised with caution.
If you cosign for a loan, consider following the same basic precept that people are advised to follow when lending money: Don't cosign for a loan or other financial obligation in an amount greater than you are prepared to lose. Think also of how a default will affect your relationship with the borrower. Many family relationships, including parent-child relationships, are strained or even broken when a relative defaults on a car loan. Sometimes the cosigner finds that they didn't really know the person until default occurs, and they learn that the borrower could pay the loan if they chose but prefers to let the cosigner pick up the debt so that they can indulge themselves, effectively at the cosigner's expense.
If you decide to cosign for a loan or lease, there are steps you can take to protect yourself.
First and foremost, consider if you are being asked to cosign because the person who is asking that favor of you truly needs your help, or because they want to live beyond their means. For example, if you are asked to cosign for a $40,000 car loan, it's fair to ask the borrower why they aren't considering a less expensive vehicle, perhaps from the used car market, perhaps even one they can afford to purchase with their own credit.
When cosigning for a lease:
Have a Clear End-Date - Make sure that there is a clear end-date, after which you have no further responsibility as a co-signer. For example,
For a month-to-month lease, have your obligation as guarantor end after a specified number of months.
For a lease with a defined lease term, make sure that your obligation ends at the conclusion of the initial lease term and that, if the lease is renewed or continued after the conclusion of the initial term, you are not committing yourself as a guarantor beyond that date.
Require Approval for Lease Modification - If you are cosigning for a tenant who will be sharing housing, such as a college student who is renting a house along with other students, you should require that any major change to the lease, including the release or addition of a co-tenant, be subject to your approval. You don't want to find yourself obligated to pay for damage caused to a rental property by somebody you don't know.
Make Sure Your Obligation Ends With the Tenancy - In a shared housing context, if you are cosigning on behalf of one tenant, you will often be liable for the rent and for damages caused by any tenant. If you are providing your guaranty for the benefit of only one tenant, make sure that your obligation will end if that tenant is released from the lease before the end of its term.
Landlords may balk at the idea of adding clauses to their leases in order to benefit a guarantor, but it's in their interest to have as many people obligated to cover the tenants' rent for as long as possible. If a landlord won't agree to give you reasonable assurances, you have the option of telling the tenant to seek a different cosigner.
When co-signing for a loan:
Understand Your Obligation - Make sure you clearly understand your obligations under the loan. While you should expect to be responsible for the loan over its defined term, and for any unpaid payments, interest, and costs associated with foreclosure or repossession, what happens if the borrower has difficulty during the loan and seeks an extension or forbearance? Does the lender have to seek your consent before extending or modifying the loan at the borrower's request? Are you responsible for the added interest, costs and penalties associated with any loan extension?
Find Out About Your Eligibility for Release - Does the loan include any provisions for your release as a cosigner? If so, exactly when and how can you get released? If not, can you negotiate a release, following an agreed amount of time during which the loan is in good standing?
Find Out if You'll be Notified - Find out if the lender will notify you about problems with the loan, or if the first time you're likely to learn about the loan is from a collection agency after a default occurs and it's too late to minimize the harm to your credit.
Some lenders may tell you that they cannot modify their requirements for a guarantor, and that you must either sign the contract as presented or the borrower will have to find another guarantor. In many cases that will be true -- mortgage lenders and car loan providers are not in the business of customizing their contracts for individual customers. If you cannot negotiate a better deal for yourself, recall that you have the option of declining to cosign.
If you're already a cosigner for a loan, you should try to protect yourself by communicating with the debtor about the loan, and by trying to be removed as cosigner at your earliest possible opportunity.
Monitor Your Credit Report - If the loan is being reported to the major credit reporting agencies, late and missed payments may show up on your credit report. If they do, you can contact the debtor and try to figure out a solution before a default, repossession or foreclosure.
Get Released at Your First Opportunity - If you are able to negotiate conditions upon which you can be released as a guarantor, or a release is available from the lender, seek release as soon as you are eligible. When available, release provisions typically require that the borrower has been current with payments for an extended period of time (perhaps a period of years) and that they have sufficient income to pay the loan based upon their own income and credit. If you don't seek a release, and your borrower later misses a payment or loses their job, it may be years before you again qualify for a release.
Communicate With the Debtor - If you know a debtor well enough to cosign for their loan, you know them well enough to keep in touch and, on occasion, to ask them about the loan. If appropriate, gently encourage them to refinance under their own credit to end your obligation.