Cosigning a Loan

Cosigning a Loan:   Look Before You Leap Your grown son or daughter has asked for help cosigning a loan for a car title. Or a friend is facing hard times and needs a new car, but does not have good credit and asks you to co-sign a loan.   Make sure you understand what cosigning really means before you agree. Under federal law, creditors are required to give you a notice that explains your obligations as a co-signer. This 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. Many think that as a cosigner versus the primary borrower, you have less obligation. But the fact is, when you co-sign a loan, 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 the amount due. The creditor can collect this debt from you without first bothering to try 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 show up o­n your credit report. Three Out of Four Cosigners Are Often Left Holding the Bag This might stop you from cosigning a loan for a car title or other valuable.   Studies of some lenders (think automobile) 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 refused to take. If the borrower met the lender's standards, the lender wouldn't require a cosigner. In most states, the cosigner versus the primary borrow may have it worse. If you cosign and your relative or friend misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased due to late charges or by attorneys' fees, if the lender decides to sue to collect. If the lender wins the case, your wages and property are o­n the line. If You Do Cosign Despite the risks, there may be times when you want to cosign. Your child may required a first loan, or a close friend may really need your assistance. Before you cosign, consider this information: Make sure you can afford to pay the loan. If you're asked to pay and cannot afford to, 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 possessions. 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 documents, such as the loan agreement, 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, but the borrower should be willing to oblige you.   Finally, check your state law for additional cosigner rights. Try to help someone, but not expose yourself in such a way as to sour the entire experience. * 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.