The Pitfalls of Co-signing a Loan

Cosigners, Co-makers, Joint-makers, Sureties, and Guarantors

Consumers, businesses, and non-profits often seek to buy products or items, such as vehicles, homes, and clothes, but do not have the funds to pay for said items at the time of purchase.  The sellers of these items – lenders, retailers, dealers, banks, finance companies, etc. – may sell the product on credit but require another person to also be responsible for the debt.  It is not uncommon for a lender to say that one person is not enough; therefore, a co-signer, co-maker, joint-maker, surety, or guarantor is used.  If the person making the purchase is unable to pay the debt, the seller (or finance company) will collect the money instead from the cosigner, co-maker, joint-maker, surety, or guarantor.

What is a co-signer?

The terms co-signer, co-maker, joint-maker, surety, and guarantor all have different legal meanings. Nevertheless, if you agree to pay for another person’s debt if he or she defaults (or does not pay), regardless of designation, you will be responsible for the debt. Generally, a co-signer is an individual who willingly signs documents that state he or she will back another individual’s loan if that person, the original borrower, cannot or will not make the payment.

Similarly, the terms co-maker or joint-maker involve two or more individuals signing documents that state that each of them will repay loans and is liable to ensure that the full amount of the repayment is paid. A surety is someone who has the legal responsibility to repay another person’s debt and gains liability when the other person is unable to make the payment; he or she signs a document identifying himself or herself as a surety.  A guarantor promises to pay the debt in the event a maker or another person does not pay the original debt and guarantee that he or she will be responsible for the debt if the other person is unable or fails to pay it.

Are there downsides to being a co-signer for a loan?

There are pitfalls to agreeing to be a co-signer, co-maker, joint-maker, surety, and guarantor. You have assumed responsibility for repaying the loan if the purchaser fails to pay for any reason. This, of course, may affect your credit and drain you personally. It also can affect and hurt your relationship with the person who is the purchaser. Know the risks; you may wind up paying for another person’s debt and receive no benefit for doing so.

The lender can demand payment from you, enforce the contract, sue you, and win a judgment. Then, the lender may execute on your bank accounts, funds, and property. When you are a co-signer, co-maker, joint-maker, surety, or guarantor, the lender requires you to sign a contract. The contract is written by the lender’s lawyers to protect the lender, not you. Therefore, carefully read the contract, negotiate the terms, and understand the risks and consequences for you if the borrower is unable to pay the loan back. Even if the original borrower dies or becomes disabled, lenders will continue to hold your responsible.

Ask yourself some questions before co-signing a loan

Being a guarantor could harm your financial credit and make the process of securing your own loan more difficult. Therefore, before you agree to be responsible for another person’s debt, ask yourself these questions: Why is it necessary for the borrower to have a guarantor? Is the borrower trustworthy enough to receive and pay back a loan? Does the borrower truly need the loan? Are you willing to make the payments if the borrower cannot or will not make the payments himself or herself? What assets are you willing to relinquish, or have repossessed, if you cannot make the payments?

If you are asked to be a cosigner, co-maker, joint-maker, surety, or guarantor, remember this: Be sure you completely understand what is asked and expected of you. If you do not understand your responsibilities as a co-signer, co-maker, joint-maker, surety, or guarantor, consult with a lawyer or an independent financial advisor.  Know the risks. If you have questions about America’s contract and financial laws, talk to a skilled and experienced lawyer. For more information and to have questions answered, contact Nashville Attorney Perry A. Craft. Call our offices today or fill out our contact form to schedule a consultation.