What would you do if a friend or family member asked you to cosign a loan? Before you answer, make sure you understand what your obligations are.
When you agree to cosign for someone else's debt, you are essentially guaranteeing payment if that person defaults. You are being asked to take a risk that a professional lender will not take. Think about it: the lender would not need a cosigner if the borrower were a good risk.
Cosigning Means You're Financially Responsible -- Consider the Risks
The obligations associated with cosigning a loan can be more than people expect. So before you put your autograph on the dotted line agreeing to cosign a loan, the Federal Trade Commission requires the creditor to give you information explaining your commitment. It states:
"You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't 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 part of your credit record. This notice is not the contract that makes you liable for the debt."
If you are thinking about cosigning you should consider the following:
- Be sure you can afford to pay the loan. If you're asked to pay and you 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 home or car, be sure to understand all the consequences. If the borrower fails to pay, you could lose these items.
- You may have to pay the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs in addition to the outstanding debt.
- Ask the lender to calculate the money you might owe. You may also negotiate specific terms of your obligation.
- Ask the lender to agree, in writing, to notify you if the borrower misses a payment. Doing this 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 the important contracts.
- Check your state law for additional cosigner rights.
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