What Is Co-Signing?

Finding a co-signer for a loan, rental agreement or some other financial contract is necessary for many people who lack an adequate credit history. Called a guarantor, this person is often required by the lender or landlord to be a homeowner or at least in sound financial standing. Co-signing on a financial contract, often called a guaranty or promissory note, means this secondary party will often be responsible for posting collateral and paying what is owed if the principle signer cannot.

Co-signing is regularly requested by lenders from all but those with the very best credit ratings. This includes those seeking a loan for college, a car, a house, a line of credit or even an apartment to rent. The credit score threshold varies widely according to the signer's income and financial history, but a score above 700 is considered excellent and will often preclude the need for a co-signer. A score above 600 is considered good, but may require a second party to the contract. Anyone with a score below 600 is likely to require a co-signer.

If a principle party is told that co-signing will be necessary, many seek that assistance from family, friends or business associates. Though the protocol varies by country, and even individual states within a country, a co-signer is frequently asked to post certain collateral like equity in a home or car to satisfy the loan requirements. A credit check will also be required of the co-signer, or guarantor, to ensure a responsible financial history. After those preliminaries, the lender, co-signer and principle signer will sign the guaranty together, often with a notary public or attorney as a witness.

If a loan or rental agreement starts to fall into arrears, co-signing could lead to financial hardship. At first, this may just result in a phone call or letter from the lendor, asking the co-signer to pay the balance owed. This often provides the needed trigger to make the principle party pay. If the debt is still not paid, the co-signer will continue to be targeted for payment and may even have the episode posted on his or her credit report. As a result, two credit scores are potentially lowered instead of just one.

For defaulted loans in the United States, the Federal Trade Commission notes that about three of four cosigners end up responsible for the debt. This sum often will include collection costs or late fees as well as any attorney costs associated with the default. To avoid this, many co-signers ask lenders for immediate notification of a missed payment.