Does It Hurt Your Credit to Cosign?

State laws govern the rights that creditors have against cosigners. In most states, as recognized by the Federal Trade Commission, lenders can immediately pursue collection efforts against cosigners without first attempting to collect their debts against primary debtors. As further noted by the Federal Trade Commission, a primary borrower's failure to pay his loan can hurt his credit record as well as his cosigner's credit record.

Overview

In most cases, cosigners are relatives of primary borrowers. Most often, a primary borrower's credit history is insufficient to qualify for a vehicle loan or other type of loan for personal property. As a cosigner, the individual cosigning a loan becomes financially responsible for repayment. If the primary borrower defaults or simply sends one payment after the due date, the lender can demand repayment from the cosigner for the delinquency. Furthermore, a lender can demand repayment of late fees and interest from a cosigner. Unlike "guarantee loans," lenders can pursue repayment from cosigners even before a buyer is technically in default.

Legal Consequences

Although the Federal Trade Commission regulates the disclosure notices, it does not regulate state laws governing the consequences of default. Creditors have a legal right to report any default by the primary borrower to credit reporting bureaus. The negative report can affect the credit records of both the primary borrower and cosigner. Furthermore, joint and several liability laws allow lenders to sue cosigners and primary borrowers separately for repayment of their loans. Moreover, a lender can sue a cosigner without suing the primary borrower. Lenders can garnish and levy a cosigner's personal property and wages once he obtains a judgment and writ of execution.

Federal Law

Under the mandatory federal disclosure laws, creditors must provide cosigners with an informational statement regarding their rights. Codified in the Code of Federal Regulations, banks and lenders engage in deceptive practices in violation of federal consumer protection laws if they fail to provide cosigners with a disclosure notice.

Disclosure Notice

A lender must place its cosigner disclosure notice conspicuously in the original loan agreement or within a separate document. A lender must specifically state that it has a right to collect debts from the cosigning party without first attempting to collect its debts from the primary borrower. Furthermore, a lender must notify a cosigner that it has the same collection rights against the cosigner as it has against the primary borrower. The lender must warn consumers that as cosigners of loans, they may experience lower credit scores and damage to their credit reports.