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What Co-Signing
Involves
What would you do if a friend or
relative asked you to cosign a loan? Before you answer, make sure you
understand what cosigning involves. Under federal law, creditors are
required to give you a notice that explains your obligations. The
cosigner's notice states:
You are being asked to
guarantee this debt. Think carefully before you do. If the borrower does not
pay the debt, you will have to. Be sure you can afford to pay if you have
to, and that you want to accept this responsibility.
You may have to pay up to the
full amount of the debt if the borrower does not pay. You may also have to
pay late fees or collection costs, which increase this amount.
The creditor can collect this
debt from you without first trying to collect from the borrower.* The
creditor can use the same collection methods against you that can be used
against the borrower, such as suing you, garnishing your wages, etc. If this
debt is ever in default, that fact may become a part of your credit record.
This notice is not the contract
that makes you liable for the debt
* Depending on your state, this may not
apply. If state law forbids a creditor from collecting from a cosigner without
first trying to collect from the primary debtor, this sentence may be crossed
out or omitted altogether.
Co-Signers Often
Pay
Studies of certain types of lenders
show that for cosigned loans that go into default, as many as three out of four
cosigners are asked to repay the loan. When you're asked to cosign, you're being
asked to take a risk that a professional lender won't take. If the borrower met
the criteria, the lender wouldn't require a cosigner.
In most states, if you cosign and your
friend or relative misses a payment, the lender can immediately collect from you
without first pursuing the borrower. In addition, the amount you owe may be
increased - by late charges or by attorneys' fees - if the lender decides to sue
to collect. If the lender wins the case, your wages and property may be taken.
If you do Co-Sign
Despite the risks, there may be times
when you want to cosign. Your child may need a first loan, or a close friend may
need help. Before you cosign, consider this information:
- Be sure you can afford to pay the loan. If
you're asked to pay and can't, you could be sued or your credit rating could
be damaged.
- Even if you're not asked to repay the debt,
your liability for the loan may keep you from getting other credit because
creditors will consider the cosigned loan as one of your obligations.
- Before you pledge property to secure the
loan, such as your car or furniture, make sure you understand the
consequences. If the borrower defaults, you could lose these items.
- Ask the lender to calculate the amount of
money you might owe. The lender isn't required to do this, but may if asked.
You also may be able to negotiate the specific terms of your obligation. For
example, you may want to limit your liability to the principal on the loan,
and not include late charges, court costs, or attorneys' fees. In this case,
ask the lender to include a statement in the contract similar to: "The
cosigner will be responsible only for the principal balance on this loan at
the time of default."
- Ask the lender to agree, in writing, to
notify you if the borrower misses a payment. That will give you time to deal
with the problem or make back payments without having to repay the entire
amount immediately.
- Make sure you get copies of all important
papers, such as the loan contract, the Truth-in-Lending Disclosure
Statement, and warranties - if you're cosigning for a purchase. You may need
these documents if there's a dispute between the borrower and the seller.
The lender is not required to give you these papers; you may have to get
copies from the borrower.
- Check your state law for additional
cosigner rights.
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