What would you do if a friend or relative asked you to cosign a loan? It is easy enough to say yes. But your signature means a lot more than a "vote of confidence" in a friend or relative. Cosigning is serious business.
Cosigners Often Pay
Some studies show that three out of four cosigners of finance company loans are asked to repay the loan. That should not surprise you. When you are asked to cosign, 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.
If you do cosign and your friend or relative misses a payment, the lender can collect from you right away without pursuing the borrower first. And the amount you owe may be increased--by late charges or by legal fees - if the lender decides to sue to collect. If the lender wins the case, he or she may be able to take your wages and property.
Do not be pressured into cosigning. Consider your decision carefully--cosigning may not be a good idea.
If You Do Cosign
Despite these risks, there may be times when you want to cosign. Perhaps your son or daughter needs a first loan, or a close friend is facing repossession, court action, or otherwise needs help. Here are a few things to consider before you cosign:
2. Consider carefully before you pledge your property, automobile, or furniture to secure the loan. If the borrower defaults, you could lose these possessions.
3. Ask the lender to establish the specific amount of money that you might owe. The lender does not have to do this, but some will if asked. You may also be able to negotiate the specific terms of your debt. For example, you may agree to pay 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 this: "The cosigner will be responsible only for the principal balance on this loan at the time of default."
4. Ask the lender to agree, in writing, to notify you if the borrower misses a payment. Notification should come before a late charge is added, or before the loan is "accelerated" (when the whole loan must be repaid at once). This way you will have time to deal with the problem or make back payments without having to repay the whole amount.
5. Make sure you get copies of all important papers signed by the borrower: the loan contract; the Truth-in-Lending Disclosure Statement; and any warranties for products purchased if it is a credit sale. You may need these if there is a dispute between the borrower and the seller.
Notice to Cosigners
As of March 1, 1985, the Federal Trade Commission requires that all cosigners be given the following notice:
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, the fact may become a part of your credit record.
This notice is not the contract that makes you liable for the debt.