Only co-sign what you could pay yourself

Someone you care about has found a car, a flat or a loan they cannot get on their own. The lender wants a second name, and they are asking you. It can sound like a small favour: a signature, a good word on their behalf. Some people say it is not an endorsement of the person but a legal guarantee, and many people say that means a promise to pay all of it.

This page is for the person being asked. If you have already signed, or you are the one who needs a co-signer, there are notes at the end.

Co-signing makes you personally responsible for the whole loan, so sign only if you could pay all of it yourself and could live with not getting it back.

What your name on the loan does

Many people say the same thing: there is no partial share. If the borrower stops paying, the lender can ask you for all of it.

The US Federal Trade Commission, the consumer-protection agency, says so in the notice a lender must give a co-signer: you may have to pay up to the full amount if the borrower does not, and late fees or collection costs on top. It adds that the lender can collect from you without first trying to collect from the borrower, and can use the same methods, such as suing you or garnishing your wages. Some people warn that lenders go after the co-signer first, because the co-signer has the better credit. The FTC’s notice says the lender is allowed to. Some states have their own protections, and the FTC suggests looking up yours.

Some people warn that a default or a collection account damages the co-signer’s credit score, and that this can follow you into renting, jobs and borrowing. The FTC says a default can become part of your credit record. It also says that co-signing may stop you getting credit yourself even when the borrower pays on time, because lenders treat the loan as your debt. Some people put it in terms of the debt-to-income ratio: the co-signed loan counts against you when a bank decides how much to lend you for a house.

The FTC says co-signing gives you no ownership, title or interest in what is being bought. Some people describe the result as paying for something you cannot use or sell.

Some people point out that even complete trust in the borrower does not shield you from job loss, illness or death.

Some people read the request itself as a signal

Some people say that needing a co-signer means a professional lender has already looked at this person and said no, and that you are being asked to take a risk the lender would not. Some people say it matters which kind of person is asking: someone with no history whom you trust is a smaller risk than someone who has already missed payments. One person points out that having no credit history is not a bad history, since everyone starts with none.

Questions to ask before you answer

• Would you lend this exact sum from your own pocket today? Some people suggest this test and say that if the answer is no, you should not co-sign.
• Could you carry both? Some people say to refuse when you cannot cover your own big debts, a mortgage for example, and the other person’s possible bill.
• What is the most you could owe? The FTC suggests asking the lender, and asking it to send you statements or tell you when a payment is missed. It also suggests asking the borrower for a budget that shows how the loan will be repaid, keeping copies of every paper, and checking your own credit reports from time to time.
• Is there a way out? The FTC says a lender might include a release option in the agreement, but that lenders are unlikely to agree to one.

When the borrower is your child

People disagree about this one. Some people say co-signing for your own child is an acceptable exception, provided you could afford the full payment. Some people say the exception stops there: even a mother or a brother can default, and it can ruin the relationship. Some people say it can build credit for a responsible child who has no credit history, if every payment is on time. One person says even a parent who co-signs may later lean on the debt as leverage, or bring it up against the child. What decides it, they say, is how reliable the person asking has been with money, and whether you see it as backing a dependent or doing a favour for an adult who is independent. The FTC’s notice to co-signers does not treat a parent any differently, and the lender can ask you for all of it.

If you want to help without signing

Some people suggest buying the thing outright as a gift instead, because a gift carries none of the legal tie that a co-signature does, though they say the friendship may still fade. One person suggests asking the relative whether they actually qualify for financing on their own, or have savings, so they face their own position before you take it on.

Saying no

Some people say that co-signing is itself what costs the relationship, through resentment and blame over the money. One person says refusing can damage a friendship too, and some people say they felt bitter about a parent who would not co-sign. One person says a no can bring guilt-tripping or silent treatment from the family member, which they say may hurt more than the money risk. Another person says you can turn down a parent’s request and keep the relationship, if there is mutual respect and clear talk. One person says a firm “absolutely not” leaves no wiggle room, where “sorry, I can’t” leaves some.

The FTC’s notice to co-signers opens by telling you to think carefully before you agree.

If you already signed

This page does not cover how to get your name off a loan. The FTC’s page does not either, beyond the release option above.

Some people point out that handing the car back to the borrower does not take your name off the loan, and that being listed as the second signer rather than the first changes nothing about what the lender can ask of you. One person points out that if a repossessed car sells for less than the loan, the rest is still owed, and the FTC’s notice says the lender can collect the debt from you. If payments have stopped or are about to, a non-profit credit counsellor can talk it through; the cards at the foot of this page list some. In the UK, MoneyHelper and StepChange help with money and debt.

Who this page is not for

If you are the one who needs a co-signer, this page is the view from the other side of the table; it does not tell you how to get approved by yourself. One person points out that newcomers with no credit history where they now live sometimes need one, and some people say that is a different case from someone who has missed payments before.

If you have already co-signed and are in trouble now, the section above is only a signpost.

If your name is going on a business loan, one person warns that these are especially risky, because businesses fail and the owners can be left with the debt personally; this page does not cover them in detail.

Outside the United States, the rules differ. In the UK the person is called a guarantor, and the Financial Ombudsman Service says a guarantor guarantees to make the payments if the borrower does not. Elsewhere, the law differs and this page does not cover it.