Cosigner's Rights & Responsibilities

When a borrower applies for a loan or credit, lenders check the borrower's credit score to assess the likelihood that he will fail to make payments on the debt. Borrowers may have poor credit scores for a variety of reasons, such as having a short credit history, a track record of missing debt payments or a past bankruptcy, which can make it difficult to get approved for new debt. Loan co-signing is a process where a third party agrees to pay for a debt if the primary borrower fails to pay.

Co-Signing Basics

Lenders may be willing to approve loans or credit accounts to risky borrowers if they are able to get a co-signer that has good credit history and a dependable income. Young people like college students or recent graduates typically have short credit histories and may have difficulty getting a loan; co-signers are often parents or other relations of those with low credit scores.

Co-Signer Responsibilities

When a borrower co-signs a loan, he becomes responsible for the payment of the loan. If the primary borrower fails to pay the loan, it falls to the co-signer to pay back the loan out of his own pocket. According to Wells Fargo, a co-signed loan becomes a part of the co-signer's credit history and includes late payments made by the borrower, meaning co-signing a loan can hurt the co-signer's credit score. If the primary borrower declares bankruptcy or dies the co-signer may still be responsible for paying back the loan.

Co-Signer Rights

The rights of a co-signer vary from one case to another depending on the terms of the loan, but oftentimes co-signers have few rights. The U.S. Federal Trade Commission advises co-signers to get copies of documents including the loan contract, the Truth-in-Lending Disclosure Statement and warranties and to get the lender to agree to notify you if the borrower misses a payment. However, lenders are not required to give copies of documents to co-signers or to notify them about missed payments. In the case of student loans, lenders may agree to release the co-signer form responsibility for paying the loan if the student dies or becomes permanently disabled.

Considerations

The Federal Trade Commission warns that co-signers often end up paying for debts and that when you co-sign you essentially take on a risk that a lender isn't willing to take on itself. In addition, you may be responsible for paying late charges, and the lender can potentially sue you to collect payment.