What Happens if You Cosign and the Borrower Doesn't Pay?

When you’ve cosigned a loan and the borrower fails to pay, what does this mean for you? Find out here.Image source: Getty Images.

Have you cosigned a loan or are you thinking about doing so? Cosigning means you share legal responsibility for repayment of the loan, even though the loan was taken out for the benefit of the primary borrower. 

Because the creditor considers you responsible for the loan, you can face some pretty big problems if the primary borrower doesn’t pay back the loan on time. In fact, here are just a few things that could happen if you’ve cosigned and the borrower fails to fulfill his or her obligations. 

Your credit score could take a hit

When you cosign a loan, it shows up on your credit report. All of the details about the loan show up, including the payment record. Unfortunately, this means if the primary borrower is late on paying the loan, you’ll get a late payment posting to your report. This alone could drop your credit score by more than 100 points. 

If the primary borrower continues to not pay, you’ll have more late payments posted. And eventually the debt could be charged off or sent to collections, which means you could end up with a record of a defaulted loan on your report. You can pretty much forget about getting approved for financing at reasonable rates with this derogatory mark. 

You could start getting collections calls

While the primary borrower promised to pay back the loan, the creditor required a cosigner because the creditor didn’t trust the borrower do so. When you cosigned, you assumed full legal liability for debt repayment -- and the creditor is definitely going to try to collect by any means necessary from anyone with the ability and obligation to pay. 

That means you’re probably going to get calls from collectors asking you to send in the cash after a payment is late or a loan goes into default. Dealing with debt collectors calling can be stressful, although there are laws that prohibit them from harassing you or calling too early or too late. 

You could be sued

Unfortunately, creditors have the legal right to try to collect from both the primary borrower and a cosigner -- and the credit issuer may decide suing you is the best option to try to get the loan paid back. This is especially true if it’s clear the primary borrower doesn’t have the money to pay the bill. 

If you’re sued, you need to show up in court or could risk a default judgement (a judgement against you without you being there). A judgement will show up on your credit report and hurt your score. The process of going to court to deal with the lawsuit can also be really stressful and sometimes expensive if you hire a lawyer or have to take time off work.

You could end up with your wages garnished or a lien on your property

If a creditor gets a judgement against you, they can take action to enforce the judgement if you or the primary borrower doesn’t pay. This could lead to your wages being garnished and money being taken directly out of your paycheck. It could also result in a lien being put on your property. 

Think carefully before you cosign

As you can see, the consequences for cosigners can be dire if a borrower doesn’t pay back the loan. You need to be aware of the risks to your credit score before you cosign. If you’ve already cosigned for a loan, make sure to follow up with the borrower regularly to ensure payments are being made -- and check your credit report for any early signs of problems such as a late payment so you can step in if the cosigner stops paying without letting you know.