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Cosigning a Loan
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.
Cosigners
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 Cosign
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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