Consigning a Loan in Florida:Risks and Benefits

What is a cosigner?

A cosigner is someone, often a family member, who helps a borrower get approved for a loan, by agreeing to repay the loan if the borrower does not.  A bank may require a cosigned if the borrower dos not have sufficient income to qualify for the loan.  Fort example, a co-signed may sign for a car loan to enable to borrower to qualify for the car loan.

The risks to the cosigner

  • If the primary borrower fails to make a payment for any reason, the cosigner will be held liable for the missed payments.
  • The lender can sue the cosigner for interest, late fees, and any attorney’s fees involved in collection.
  • If the primary borrower cannot make payments, AND the co-signer fails to make the payments, the lender may also decide to pursue garnishment of the wages of the cosigner.
  • If there are missed payments, it could hurt the credit score of the cosigner.
    • To avoid a missed payment or late payment hurting the credit score of the cosigner, the cosigner should make sure that payments are being made on time and if the primary borrower cannot make the payment on time, the cosigner should make the payment.
    • If the cosigner starts making payments for the primary borrower, the only way for the cosigner to get the money back is to sue the primary borrower. 
  • Cosigning can damage the relationship between the primary borrower and the cosigner. Cosigning requires a great deal of trust that the primary borrower can afford the payments on the loan and that they will make them on time for the entire length of the loan.
  • Sometimes lenders will deny a loan if the person has too much debt. Cosigning on student loans, a car loan, or a mortgage could add a significant amount of debt for the cosigner. If the cosigner thinks that they will need to apply for a large loan soon after cosigning, the cosigner could be denied. This is something for the cosigner to consider.
  • It is difficult to get out of a cosigned loan for student loans. If the primary borrower files bankruptcy, student loans will not be forgiven. The cosigner could become responsible for all of the payments on the primary borrower’s student loans.
  • If the loans are forgiven by the lender, the IRS will consider the remaining loan amount “debt forgiveness income.” This means that the cosigner will have to pay taxes on the loan amount, as if the loan amount was income.

The benefits to the borrower

  • A cosigner might help:
    • Get a reduced security deposit on an apartment lease
    • Get a lower interest rate and lower monthly payment on a loan for a car
    • Secure a mortgage with a lower interest rate
    • Get a private student loan with a lower interest rate
  • Having a cosigner is helpful to the borrower. A cosigner may be necessary if the borrower does not show that they make “enough” income to secure the loan, if the borrower has bad credit, or not enough credit history, or too much debt.
  • A cosigner’s income and credit will be considered in determining whether or not the lender approves the loan for the borrower.
  • The cosigner might require the borrower to sign an agreement that promises that the borrower will pay the cosigner a certain amount if the cosigner fails to make payments on the loan.
  • The cosigner should also have access to the loan account to make sure that payments are being made on time.