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| What Would Cosigning Mean For You |
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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.
When Is It Worthwhile to Cosign?
When it's important to you that the borrower get
credit, and you have good reason to believe the borrower will repay
the debt, it can be worthwhile to cosign for a loan or credit
card.
Parents often cosign for their adult children who have ample income to qualify individually, but lack a solid credit or employment history. By cosigning, parents help their children receive a loan and establish credit in their own name.
Similarly, sometimes a spouse or family member
will cosign for a small loan or credit line to help an individual
establish or rebuild credit in their own name.
Although the statistics on cosigning support that it's a
relatively high risk, that's not always the case. There have been
many successful situations where cosigning served the interests of
all parties. Statistically, though, the risk often outweighs the
benefit. Some studies show that three out of four cosigners end up
having to repay the loan for the original borrower, so it's
important to take steps to protect yourself if you do cosign.
If you are worried about some of the risks that cosigning
carries, you may be able to negotiate specific terms of your
obligation. For example, you might want to have your liability
limited to paying the principal balance on the loan, but not late
charges, court costs, or attorney's fees. In this case, ask the
lender to include a statement in the contract like: "The
cosigner will be responsible only for the principal balance on this
loan at the time of default."
If You Need a Cosigner
If you're in need of someone to cosign a loan
for you, talk with family or friends and explain to them that
they'll be helping you to reestablish your credit. Understand that
cosigning is a big step for the person agreeing to sign for you, so
make sure you make them feel as comfortable as possible about
cosigning for you. Show them you'll be able to repay the loan.
Remember that if you fail to repay the debt and the cosigner has to
step in to repay it but can't afford it, then you both will have
damaged credit histories. Therefore, the credit you obtain will
carry a double weight of responsibility—your obligation to the
lender to repay what you borrow and your obligation to your cosigner
to live up to the investment they're making in you.
Whatever your involvement in a cosigned
credit transaction, remember that cosigning means extra obligations
for everyone involved and consider your decision
carefully.
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