Cosigning and Co-Borrowing: Know Exactly What You're Signing

Cosigner, co-borrower, guarantor

Under Regulation B, if you mean to apply jointly, that intent has to be clear when you apply. A lender can't quietly turn your individual application into a joint one because you listed a spouse's income.

The notice a cosigner must get first

The FTC's Credit Practices Rule requires lenders and retail installment sellers covered by it to give a cosigner a separate document, before the cosigner becomes obligated, that contains only this warning. In its key lines, it says:

• "You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to."
• "You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount."
• "The creditor can collect this debt from you without first trying to collect from the borrower."
• "The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc."
• "If this debt is ever in default, that fact may become a part of your credit record."
• "This notice is not the contract that makes you liable for the debt."

What cosigning can cost you

Say you cosign a $12,000 loan at 18% APR over 48 months. The payment is $352.50, and the full schedule totals $16,920.00. If the borrower makes 12 payments and then stops, the remaining principal is $9,750.39. If the contract lets the lender demand the rest of the balance after a default, it can come to you for all of it, plus late fees and collection costs, without first trying to collect from the borrower.

• Your credit takes the hit. Late payments by the borrower can show up on your reports.
• Your borrowing room shrinks. The loan counts as your debt, so it can limit what you can borrow even while the borrower pays on time.
• Pledged property is at risk. If you put up collateral, you can lose it on default.
• Plan for the worst case. The FTC suggests confirming that you could afford the payments yourself, even if your own circumstances changed, before you sign.

What a lender can and can't ask of you

The Equal Credit Opportunity Act and Regulation B set limits on who has to sign:

• If you qualify on your own for the amount and terms you asked for, the lender generally can't require anyone else's signature, including your spouse's.
• If you don't qualify alone, the lender may ask for a cosigner or guarantor, and your spouse may serve, but the lender can't insist that it be your spouse.
• On a secured loan, the lender may ask a spouse to sign the documents needed to make jointly owned collateral available, such as a lien, without making them liable on the note.
• A lender can't discriminate against a cosigner for receiving public assistance income, though it may consider whether that income will continue.

If the application is denied or offered on worse terms, you're entitled to an adverse action notice, generally within 30 days of a completed application, with the reasons or a way to ask for them. Our step-by-step borrowing guide explains what the notice must say.

Before you add a cosigner, or agree to be one

1. 1 Borrower: try alone first. A smaller amount, a secured loan or a credit union may get you approved without putting anyone else at risk. See secured vs. unsecured loans and borrowing with no credit history.
2. 2 Cosigner: ask for the borrower's budget and repayment plan, and be honest about whether you could cover the payment if your own situation changed.
3. 3 Ask the lender how much you could owe if the loan defaulted, and ask it to send you monthly statements or written notice of any missed payment.
4. 4 Keep copies of the contract, the Truth in Lending disclosure and the cosigner notice.
5. 5 Check for a release clause before signing, not after. Ask your state banking agency or attorney general whether your state adds cosigner protections.
6. 6 Watch your credit reports regularly, and dispute anything that's wrong.

Getting a cosigner off the loan

The FTC says a cosigner can be released only if the loan agreement allows it and both the lender and the borrower agree, and lenders rarely want to, because releasing you raises their risk. The record on private student loans shows how hard it is: in 2015 the CFPB found that 90% of borrowers who applied to release a co-signer were rejected. It also found most contracts still had auto-default clauses that could put a loan in default when a co-signer died or filed for bankruptcy, even if payments were current.

The more reliable exit is a refinance in the borrower's name alone, once their credit and income can support it. If the borrower is already behind, act early: our guide to a missed loan payment covers the options before default.

Common questions