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Creditors and Cosigners - Be Careful What You Sign up For

Feb. 25, 2021

It's not unusual for creditors to require a cosigner when they give credit to someone who doesn't have a great credit history.

For example, if young adults are applying for student loans, the lenders will often require the parents to sign as a cosigner on the debt before they agree to issue a substantial student loan to the student. The same standard often is followed before a creditor will issue a car loan or even a credit card to someone who doesn't have the greatest credit history. The reason for the requirement of a co signer should be pretty obvious - the lender is now doubly protected. If the borrower does not pay when required to do so, the lender will go after the cosigner.

Sometimes a cosigner will not even realize when the borrower has defaulted in payments. The cosigner may just be assuming that the primary borrower is making all of his/her payments on time, and then, lo and behold, one day someone knocks on the cosigner's door and hands him a legal paper and says, "you are being sued." The cosigner is totally blindsided - he has no idea who would sue him or why he would be sued. But then when he looks carefully at the documents, he sees that his son hasn't made a student loan payment for 6 months, and now the student loan people are suing the father.

Let's assume the son borrowed $10,000, and the father co-signed, and the son still owes a balance of $8000 on the debt. You might think that the student loan people should try to collect $4000 from the son, and $4000 from the father. But that's not exactly what the law says. A creditor has the right to collect the debt in full from either the borrower or the cosigner. So in this case, the student loan people can take Dad to court, they could win the case, and they could collect the entire $8000 from Dad.

Such is the law as it pertains to cosigners. When you cosign on a debt, you are just as responsible as the person who got the money, The son got the money, and Dad got the stress and aggravation. Its obvious therefore that the purpose of a cosignor is to doubly protect the creditor - if the original signer doesn't pay, the cosigner could be held legally responsible for the entire.balance owing on that debt.

Now that you know the rules, are you sure you want to cosign loans for your kids or anyone else? Cosigner beware - you are not doing yourself any favors when you cosign for someone elses legal debts