When you co-sign for a loan, you promise to repay a debt. Many people confuse the role of a co-signer with that of a loan guarantor, but in many states, these two roles work quite differently. However, in the long term, both co-signers and guarantors assume the ultimate responsibility of repaying a loan.
Co-signer versus guarantor
When you sign a loan as a guarantor, you promise to repay the debt if the borrower cannot afford to do so. In many states, lenders must attempt to collect the debt from the borrower even if that means taking the borrower to court. State laws often require the lender to exhaust all other avenues before holding the guarantor liable for the debt. When you co-sign on a loan, you and the borrower share the responsibility of repaying the debt from the outset. You may strike an informal arrangement with the primary borrower whereby the primary applicant agrees to repay the loan, but from the lender's perspective you are co-applicants and equally responsible for the debt.
Benefits
Parents and guardians often co-sign on student loans for their children because lenders do not approve loans for individuals who have little or no income and no prior credit history. Aside from students, people who have had past credit issues often seek out co-signers because they find themselves unable to obtain new credit. If you co-sign a loan application, your good credit and high income level raise the quality of the application and increase the likelihood of the loan being approved.
Risks
Generally, lenders send loan statements to the mailing address of the primary borrower. Notices about late payments and defaults are sent to this same address. Every time you miss a loan payment by more than 30 days, the lender notifies the credit bureau. Late payments have a negative impact on your credit score. As a co-signer, you may not realise that the primary borrower has defaulted on the loan for several months, by which time your credit score will have plummeted. This makes obtaining new credit much harder. Late fees and interest penalties cause the balance of the delinquent debt to steadily increase over time. You could face court action and wage garnishments if you do not repay the loan.
Home loans
If you co-sign for a mortgage on a home that you do not own, the lender can foreclose on that home rather than your own home. However, in some areas, certain types of loans such as refinances or equity lines of credit are classified as recourse loans. This means that if the lender cannot raise enough money to cover the debt by selling the foreclosed home, he can sue the loan signers and co-signers for the remainder of the debt. Therefore, think seriously before you co-sign even a secured loan because the collateral may not prove sufficiently valuable to cover the debt.
Source: ehow.com
