Co-signer Considerations

Monday, July 29 at 11:05 AM
Category: Personal Finance

With the year in full swing many are making big plans like buying a car, buying a house, going to college or any other number of activities which requires more money than some people have in savings. As a result, many turn to loans to help finance these big events in their lives. You may have a family member or close friend approach you about co-signing on a loan with them. Here are some things to be aware of before and after you co-sign a loan.

Before You Co-sign
Although there are some risks, there may be times when you want to co-sign. Your child may need a first loan, or a close friend may need help. Before you co-sign, consider how it might affect your financial well-being.

  • Can you afford to pay the loan? If you're asked to pay and can't, then you could be sued, and 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. Creditors will consider the co-signed loan as one of your obligations.
  • Before you pledge property -- like your car or boat -- to secure the loan, make sure you understand the consequences. If the borrower defaults, then you could lose these items.
  • Ask the creditor to calculate the amount you might owe. The creditor doesn't have to do this but might, if you ask.
  • If you're co-signing for a purchase, then make sure you get copies of all important papers like the loan contract, the Truth-in-Lending Disclosure Statement and warranties. These documents may come in handy if there's a dispute between the borrower and the seller. The creditor doesn't have to give you these papers; you may have to get copies from the borrower.
  • Check your state law for additional co-signer rights.

The Co-signer's Notice
When you co-sign a loan, the lender (known as the "creditor") must spell out your obligations in a co-signer's notice. Here’s an idea of what you can expect the obligations to look like:

  • You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, then you will have to. Be sure you can afford to pay if you have to, and 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.
  • In some states 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, including suing you or garnishing your wages. If this debt is ever in default, then it may become a part of your credit record.
  • This notice is not the contract that makes you liable for the debt.

Before making the decision to co-sign a loan make sure you understand your obligations as a co-signer.

Tags: Financial Education, Home Loans, Lending and Financing
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