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Cosigning A Loan
Continued..
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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