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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 lender may require a cosigner if the borrower does not have enough income, or enough credit.  If the cosigner has better credit, cosigning the loan might also help lower the interest rate.

Examples: A co-signer might sign for a car loan, a mortgage, student loans, or an apartment lease.

Related legal terms

Under Maryland law, there are several words whose meanings are closely related to co-signers.  These include secondary obligor, surety, and accommodation party.

Secondary obligor

A secondary obligor is someone who signs a loan to help another person.  The person who is helped is called the primary obligor. Like the name suggests, the primary obligor is the first person that the lender will look to for payments on a loan. If the primary obligor fails to make payments, the lender will look to the secondary obligor.

Read the Law: Md. Code Ann. Commercial Law § 9-102(a)(73)

For example, after graduating from college, Alice needs a car to get to her job, but because this is her first job and she is young, Alice does not have income history and a good credit history. Alice cannot find a bank that will lend her the money to buy a car. Alice asks her Uncle Bob to co-sign the loan because Uncle Bob has great credit. With Uncle Bob, the loan is approved! Alice is the primary obligor and Bob is the secondary obligor. If Alice doesn’t make the monthly payment on the loan, Bob will be responsible for making the payments.

Surety

A surety is someone who agrees to be legally responsible if another person fails to pay a debt or perform a duty. Under Maryland law, if the surety pays back the money for the primary obligor, the surety can bring a lawsuit against the primary obligor to get his money back.

Read the Law:  Md. Code Ann. Commercial Law § 15-401

After two years, Alice loses her job and stops making the monthly payments on her new car, Uncle Bob will be required to start making the payments. As the surety, Uncle Bob is allowed to bring a lawsuit against Alice to get a judgment. If the judgment is approved, instead of paying back the lender, Alice will have to start paying Uncle Bob.

Accommodation Party

An accommodation party is someone who signs a loan for another person, but does not receive any benefit. The person who receives the benefit is called the accommodated party. Just like the surety, the accommodation party can sue the accommodated party if the accommodation party has to make payments.

Read the Law: Md. Code Ann. Commercial Law § 3-419(a) and (e)

In the example, Alice is the accommodated party because she receives the benefit – she gets to drive her new car. Uncle Bob is the accommodation party because he doesn’t get any benefit – he doesn’t drive the new car.

The risks to the cosigner

  • If the primary borrower fails to make a payment for any reason, the co-signer will be held liable for the missed payments.
  • The lender can sue the co-signer for interest, late fees, and any attorney’s fees involved in collection.
  • If the primary borrower falls on hard times financially and 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 co-signer.
  • If there are missed payments, or the primary obligor does not make payments on time, it could hurt the credit score of the co-signer.
    • To avoid a missed payment or late payment hurting the credit score of the co-signer, the co-signer should make sure that payments are being made on time and if the primary borrower cannot make the payment on time, the co-signer should make the payment.
    • If the co-signer starts making payments for the primary borrower, the only way for the co-signer to get the money back is to sue the primary borrower. This leads to the next risk…
  • Co-signing can damage the relationship between the primary borrower and the co-signer. Co-signing 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. Co-signing on student loans, a car loan, or a mortgage could add a significant amount of debt for the co-signer. If the co-signer thinks that they will need to apply for a large loan soon after co-signing, the co-signer could be denied. This is something for the co-signer to consider.
  • It is difficult to get out of a co-signed loan for student loans. If the primary borrower files bankruptcy, student loans will not be forgiven. The co-signer 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 co-signer will have to pay taxes on the loan amount, as if the loan amount was income.

The benefits to the borrower

  • A co-signer 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 co-signer is helpful to the borrower. A co-signer 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 co-signer’s income and credit will be considered in determining whether or not the lender approves the loan for the borrower.
  • The co-signer might require the borrower to sign an agreement that promises that the borrower will pay the co-signer a certain amount if the co-signer fails to make payments on the loan.
  • The co-signer should also have access to the loan account to make sure that payments are being made on time.
  • You should plan on having open communication with the co-signer about your finances, monthly payments and any issues that might come up over the lifetime of the loan.

Source: 

Joel Hutman and Kathleen Seifert, Maryland Volunteer Lawyers Service

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