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When you agree to be a cosigner on a loan for someone, you're essentially vouching for that person. In most cases, you'll be asked to cosign for a friend or family member who couldn't get approved for financing on their own. If they stop making payments, the responsibility will be passed on to you—and you could be sued if you don't follow through. Your credit could also suffer. Understanding what you're getting into can help you decide if being a cosigner is worth the risk. Let's unpack what happens to the cosigner when default occurs, along with steps you can take to prevent it from happening. You're Responsible for Paying the DebtWhen someone applies for a credit product, they must meet the lender's eligibility requirements to get approved. A poor credit score or thin credit file could prevent them from getting the green light. When a cosigner with strong credit steps in, it can strengthen their application. The cosigner shares equal responsibility for the debt and promises to make payments if the borrower falls behind or defaults. Cosigners can be used on student loans, mortgages, credit cards, auto loans and more. For example, roughly 92% of private undergraduate student loans for the 2021-2022 academic year had a cosigner, a study by MeasureOne, a data analytics company, found. What Happens to a Cosigner if the Borrower Defaults?Cosigned accounts will show up on your credit report. If the primary borrower repays their debt as agreed, that positive payment history can strengthen your credit score. The opposite is also true, however. And if they default, you will be required to make payments on the borrower's behalf. Here are the consequences you could face if you fail to do so.
Steps to Take if You Can't Make the PaymentsIf a default occurs and you're unable to take over the payments, there may be ways to protect your financial well-being.
How to Avoid Loan Default as a CosignerHere are some ways to protect your financial health and prevent a default if you decide to be a cosigner.
The Bottom LineBecoming a cosigner for a friend or family member could help them access much-needed financing, but it isn't without risk. If you cosign, you are legally responsible for the debt should the primary borrower default on their payments. Regularly checking your free credit report with Experian is a simple way to see if the account you've cosigned is in good standing. Beyond that, keeping in contact with both the borrower and lender can help you avoid financial surprises. What happens to a cosigner if the original borrower does not make the payments?You May Be Sued
The lender can file a lawsuit against you for any unpaid part of the debt, even if they don't sue the person you co-signed for. Or they may sell your debt to a collection agency, who then tries to get back as much as they can by suing you.
How can a cosigner get out of the loan?Co-signers are on the hook for someone else's debt, but there are ways to get out of the loan.. Transfer the balance to a 0% card. ... . Get a loan release. ... . Consolidate or refinance the debt. ... . Remove your name from a credit card account. ... . Sell the financed asset.. Can you take back a cosign?If you had a co-signer on the original loan but no longer need or want that connection, you can have that co-signer removed from the loan. You can request a co-signer release, refinance the loan, or sell the car and pay off the original loan.
Can a cosigner be in debt?The important thing to keep in mind is that, legally, cosigners are every bit as responsible for the debt as the person they're helping out. Keep in mind, too, that you could remain on the hook even if the person you're helping out files for bankruptcy.
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