Before You Cosign a Loan: A Letter to the Person Being Asked

This guide is written as a letter, because the person who most needs to read it usually isn’t the borrower. If someone has asked you to cosign a loan, it’s addressed to you; if you’re the one asking, send it to them before you talk, and read the short note at the end.

Dear Walt,

Someone you care about has asked you to cosign a loan. (You’re a composite, Walt, but the questions are the ones real cosigners ask.) It’s a generous thing to be asked to do, and a bigger thing to do than the paperwork makes it look. If the loan is $3,000 at 36% APR over 24 months (hypothetical), you’d be signing up to back $4,251.43 in payments, plus fees, on money you’ll never see a dollar of.

We’d like you to decide with the numbers in front of you, whichever way you go. So here they are.

You’d be promising all of it, not half

A cosigner promises to repay the whole loan if the borrower doesn’t. Not a share of it. The lender can add late fees and collection costs on top, and in many states it can come to you without first trying to collect from the borrower. It can use the same tools against you that it could use against them, including a lawsuit.

Here’s how that plays out. Say the borrower makes the $177.14 payment on time for a year, then stops. The balance at that point is $1,763.30, and $2,125.75 in scheduled payments is left for you to cover, before any late fees or collection costs (illustrative). If the borrower files for bankruptcy, you may still be expected to pay. And cosigning gives you no right to the money, or to anything it buys.

Ask for the one-page notice, and read the middle line twice

Under the FTC’s Credit Practices Rule, a lender it covers must hand you a separate document titled “Notice to Cosigner” before you become obligated. It holds only the prescribed text, which includes these lines: “If the borrower doesn’t pay the debt, you will have to.” “The creditor can collect this debt from you without first trying to collect from the borrower.” “If this debt is ever in default, that fact may become a part of your credit record.”

Federal credit unions have to give a substantially similar notice. Banks fall under different rules, so ask for it anyway. In states that require a lender to pursue the borrower first, that middle line can be changed; your state banking regulator or attorney general can tell you which applies where you live. The notice itself says it isn’t the contract, so read the loan agreement too. If no one offers you a notice at all, that tells you something about the lender.

It shows up on your credit, even if you never pay a cent

The account usually appears on your credit report with its full payment history, so the borrower’s late payments can show up as yours. The lender’s application may put a hard inquiry on your report, too.

The payment also counts as your debt when you apply for anything. If your gross income were $4,000 a month (hypothetical), that $177.14 payment would add about 4.4 percentage points to your debt-to-income ratio. If a mortgage, car loan or new apartment is in your next year or two, picture this account on that application before you sign. While the loan is open, you can check your reports for free at AnnualCreditReport.com.

Check which role the paperwork actually gives you

Lenders use the words loosely, so don’t go by the label. A cosigner is usually liable for the full debt but has no right to the money. A co-borrower is liable too, usually does have a right to the money, and the loan shows on their report. A guarantor is also liable, often only after the borrower defaults, and whether it shows on their credit varies. Ask the lender in writing which one you’d be. What you sign decides what you owe, whatever it’s called.

Six questions to ask before you answer

That second lender question matters more than it looks. The FTC suggests getting the lender’s promise to notify you of missed payments in writing, because by the time a collection letter reaches you, the 30-day late marks may already be on your report.

If you say yes, shrink the promise first

The easiest protection is a smaller loan. At the same 36% and 24 months, $2,000 instead of $3,000 means $118.09 a month and $2,834.33 in total, which cuts what you’re backing by $1,417.10. A shorter term helps differently: over 12 months the $3,000 loan costs $3,616.64 in total and you’re off the hook a year sooner, but the payment jumps to $301.39. That’s only worth it if the borrower can really carry it.

• $3,000
  24 months$4,251.43 · $177.14/mo
• $2,000
  24 months$2,834.33 · $118.09/mo
• $3,000
  12 months$3,616.64 · $301.39/mo, done a year sooner

• Amount borrowed
• Interest

Then ask for your own view of the account, through statements or online access, along with copies of the agreement and the Truth in Lending disclosure. For the first few months, set a calendar reminder a few days after each due date. Checking takes a minute.

Think about the way out before the way in. Many personal loans have no cosigner release, and the FTC notes lenders are often reluctant to agree to one. The practical exit is usually the borrower refinancing in their own name later, so agree on a target date now. Put that, and the rest, in a short written plan between the two of you, something like this:

When no is the kinder answer

Say no if you couldn’t pay the full balance yourself without real hardship, because you should assume you might have to. Say no if the APR is far above 36%; our cost table by APR shows how fast those rates add up, and a smaller gift or a direct loan from you may cost less than guaranteeing it. Say no if the borrower already struggles to make payments, since a cosigned loan just moves the problem onto two credit reports. And if anyone asks you for a fee to “secure” the loan, that’s a scam pattern, not a lender.

A clear no now is kinder than a yes you’ll resent in month nine.

Yours,
Cash Loan Realms

And a short note to the person asking

Before you ask, make sure you can carry the payment alone. Run it through the loan payment calculator and trim the request with our how-much-to-borrow worksheet. If a lender already turned you down, the reason on the denial notice may point to a fix that needs no cosigner; see what to do after a loan denial.

Then hand over this letter, the loan’s Truth in Lending disclosure and your budget, and give them a few days. One rule worth knowing: under the Equal Credit Opportunity Act, a lender may ask for a cosigner if you don’t qualify alone, but it can’t insist that the cosigner be your spouse.

P.S. If the answer is no, thank them anyway. They just told you the truth about the loan, which is exactly what this letter asked them to do.