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WalletPrep worksheet · Debt

Should you cosign a loan?

Name ____________________ Date __________

Key ideas

  1. A cosigner owes the whole debt. The lender can collect from you first, sue you or garnish your wages, the same as the borrower.
  2. The loan counts on your credit. It shows on your report and raises your debt-to-income ratio, which can make your own next loan harder to get.
  3. Getting released is rare. Both the lender and the borrower must agree to remove you. Some student loans offer a release after on-time payments.

Vocabulary

Cosigner
A second person who signs a loan and promises to repay the whole debt if the main borrower doesn't.
Authorized user
Someone a credit cardholder adds to their account so they can use the card. An authorized user generally doesn't owe the bill.
Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.
Debt-to-income ratio
Your total monthly debt payments divided by your gross monthly income, shown as a percentage. Lenders use it to judge whether you can take on a new payment.
Refinancing
Replacing an existing loan with a new one, usually to get a lower interest rate, a lower payment or a different term.
Secured credit card
A credit card backed by a cash deposit you make up front, usually equal to your credit limit. It is a common first card for building credit.

Work it out

Ana earns $4,500 a month before taxes and pays $600 a month on her own debts. Her brother asks her to cosign a $20,000 car loan at 9% APR for 60 months.

  1. Ana's current debt payments
  2. Cosigned car payment
  3. Debts lenders count for Ana
  4. Debt-to-income ratio
  5. $415 × 60 months
  6. Amount borrowed
  7. Interest she could owe

Check yourself

  1. Ben earns $5,000 a month and pays $500 on his own debts. He cosigns a loan with a $300 payment. What debt-to-income ratio will lenders see?

    • A. 10%
    • B. 6%
    • C. 16%
    • D. 20%

  2. If the borrower misses payments, who can the lender collect from first?

    • A. Only the borrower
    • B. The cosigner, without trying the borrower first
    • C. No one until the loan is 2 years late

  3. Which is true about cosigning a car loan?

    • A. You become a co-owner of the car
    • B. The loan doesn't appear on your credit report
    • C. You owe the debt but don't own the car

Your turn

If someone has asked you to cosign, run the loan through a payment calculator and write down the monthly payment and total cost. Then ask yourself if you could pay it alone for the full term.

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Answer key

Should you cosign a loan?

Work it out

  1. Ana's current debt payments$600
  2. Cosigned car payment$415
  3. Debts lenders count for Ana= $1,015
  4. Debt-to-income ratio23% of $4,500
  5. $415 × 60 months$24,910
  6. Amount borrowed− $20,000
  7. Interest she could owe= $4,910
  1. A $20,000 loan at 9% for 60 months has a payment of about $415. Lenders add it to Ana's own $600: $1,015 a month.
  2. $1,015 ÷ $4,500 = about 23% of her gross income, up from about 13% before she cosigned.
  3. If her brother stopped paying on day one, the full cost is $415 × 60 = $24,910, including $4,910 of interest, before late fees.

Check yourself

  1. C. 16% $500 + $300 = $800. $800 ÷ $5,000 = 16%. The cosigned payment counts as Ben's debt.
  2. B. The cosigner, without trying the borrower first The notice to cosigners says the lender can collect from you without first trying to collect from the borrower.
  3. C. You owe the debt but don't own the car A cosigner takes on the debt but gets no title or ownership rights to the car.