Personal Insights

Applying for a Loan: Co-Signing for the First Time

Getting married means learning to make financial decisions with another person, including how to manage debt. Whether you’re newly married or an LGBT couple whose marriage was recently recognized, taking on debt as a couple requires careful consideration. Here are some things you should know.

The Basics of Co-Signing a Loan

Regardless of your marital status, the consequences for borrowing money are fairly straightforward. Any time you take on debt — whether by signing for a car loan, a student loan, a mortgage, or a credit card — you legally agree to repay the amount you borrow, plus interest.

One important distinction to note, however, is the difference between co-signing a loan and co-borrowing, or being a joint borrower. If you’re applying for a loan with your spouse — if you want to purchase a family home or car together, for instance — the lender will consider you a co-borrower. You will both have ownership over the property and be jointly liable for repaying the loan.

As a co-signer, you’re assuming liability for the applicant’s loan, so you’ll have to pay for the loan if the borrower does not — but you won’t actually have any security interest in the property. Co-signing a loan doesn't mean you’re attesting to the primary borrower's ability to repay the debt; it’s saying you’re applying for joint credit and are fully liable for repayment of the loan.

Because debt liability is a serious undertaking, it's generally best to only take on debt if you have the means to repay it on your own if needed and you also have ownership of the collateral. If a friend is buying his or her own car, for instance, and you won’t have any ownership of it, co-signing on the car loan may not be the best idea.

Co-Signing a Loan Is a Binding Financial Agreement

The decision to co-sign isn’t always perfectly clear. Your spouse may need you to co-sign a student loan, for example, if he or she can’t qualify for it with his or her own credit. In the event of a divorce or your spouse's death, you would still be liable for that debt.

"A divorce decree doesn't supersede your contractual agreement with the bank," says Carmella Teague, Senior Vice President, Consumer Credit at Regions Bank. "If you agreed to repay the loan, you're still on the hook to repay the loan."

Teague recommends using the same criteria when deciding whether to co-sign as you would if you were applying for the loan by yourself: "Are you a real beneficiary of that money? Are you an owner of the car or the house? If you or your partner's income stream changes, do you feel comfortable being obligated for that debt by yourself?"

Co-Signing a Loan Could Impact Your Credit

Co-signing a loan also could lower your available credit, making it more difficult for you to get a loan in the future, depending on your income. Consider, for example, parents who co-sign an auto loan for a child who has just graduated college and is unable to qualify for the loan on his or her own.

"That becomes your debt, too," Teague says. "So when you want to go get your own car, that's on your credit history and is part of your debt burden."

Co-signing a loan can be a big commitment, but under some circumstances it may be the right choice for you. Just make sure you’ve considered and are comfortable with what it means to take on that debt.

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