What Your Cosigner Agreement Covers
Your liability as a cosigner extends to everything in the loan agreement: the original principal balance, all accrued interest, late fees, penalty charges, collection costs, and attorney fees if the lender sues. Some agreements even include a provision making the cosigner liable for costs of repossession and liquidation of collateral.
Read your cosigner agreement carefully. The most important clause is the scope of guarantee -- does it cover only the original loan, or does it also cover modifications, extensions, and renewals? Some guarantees are "continuing," meaning they survive loan modifications that increase the balance or extend the term.
How Liability Grows Over Time
A cosigned loan of $25,000 at 8% interest can grow to much more if the primary borrower defaults: after 1 year of nonpayment, the balance may be $27,000+ (principal plus accrued interest). Add late fees ($25-50 per month), default interest (some loans increase the rate upon default to 18-25%), and collection costs ($2,000-5,000 if a collection agency is involved). Attorney fees for a lawsuit add another $2,000-5,000.
A $25,000 cosigned loan can become a $35,000-40,000 liability for the cosigner within 1-2 years of default. And if a judgment is entered, it accrues additional interest (typically 4-12% per year) until paid.
Limiting Your Exposure
Before cosigning: Negotiate a limited guarantee (cap your liability at a specific dollar amount). Ask for a guarantee of collection (requires the lender to pursue the primary borrower first). Set a time limit on the guarantee. During the loan: Set up alerts for missed payments. Make payments yourself rather than let the loan default. Push for cosigner release as soon as eligible.
If you're already facing cosigner liability beyond what you can pay, your options include: negotiating a settlement with the lender (many accept 40-70% of the balance), filing bankruptcy to discharge the liability, or asserting any defenses you have (statute of limitations, improper notice of default, lender's failure to mitigate damages).
Frequently Asked Questions
Is there a maximum amount I can owe as a cosigner?
Unless your cosigner agreement includes a specific cap, your liability is unlimited up to the full balance plus interest, fees, and costs. This is why cosigning is so risky -- a $20,000 loan can become a $40,000+ liability.
Am I liable for interest that accrues after the borrower defaults?
Yes. Interest continues to accrue on the full balance even after default. Some loan agreements even increase the interest rate upon default (called 'default interest'). You're liable for all of it as the cosigner.
Can a creditor garnish my wages for cosigned debt?
After obtaining a court judgment, yes. The creditor can garnish up to 25% of your disposable wages (federal limit). Some states have lower limits. This is one of the most serious consequences of cosigner liability -- your paycheck can be directly affected by someone else's failure to pay.
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