If a relative or friend needs you to cosign on a loan, make sure you fully understand what is involved with cosigning. Chances are that you are being asked to cosign for someone with bad
credit. Using your good credit history to cosign and not knowing what is involved, can lead to a negative credit impact.
Creditors are required by federal law to explain your obligations by giving you a notice. The cosigner notice states: You are being asked to guarantee this debt. Think long, hard, and carefully before you do because you will be resposible for the debt and have to pay the debt if the borrower does not. Be sure that you want to accept this responsibility and that you will be able to afford to pay the debt if you have to. If the borrower does not pay, you might have to pay up to the full amount of the debt. You may also have to pay collection costs and late fees, which will increase the amount owed. Without first trying to collect from the debt from the borrower, the creditor might attempt to collect this debt from you. (This might not apply, depending on your state. If state law forbids a creditor from collecting from a cosigner without first trying to collect from the primary debtor, this sentence might be omitted altogether or crossed out.) The creditor can use the same collection methods against you that can be used against the borrower, such as garnishing your wages, suing you, etc. If this debt is ever in default, that fact may become a part of your credit record. This notice is not the contract that makes you liable for the debt.
Studies of certain types of lenders show that for cosigned loans that go into default, as many as 3 out of 4 cosigners are asked to repay the loan. You are being asked to take a risk that a professional lender will not take, when you are asked to cosign. If the borrower met the lenders credit criteria, the lender would not need a cosigner. In most states, 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, if the lender decides to sue to collect, the amount you owe may be increased by fees from attorneys' or from late charges. Your property and wages may also be taken from you, if the lender wins the case,.
Despite the risks, there may be times when you may want to cosign for someone because it is for a family member or close friend. Before you decide to cosign for someone, you may want to consider the following information: Make sure you can afford to repay the loan if you have to. If you are asked to pay for the loan and can't, your credit rating could be damaged or you could be sued. Even if you are not asked to pay back the loan, your liability for the debt may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations. Before you secure the loan with pledged property, such as your furniture or car, make sure you know and fully understand the consequences. You could lose these items, if the borrower defaults. Ask the lender to calculate the amount of money you might owe. The lender isn't required to do this, but may if they are 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, attorneys' fees, or court costs. 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 make back payments and deal with the problem, without having to immediately repay the entire amount. If you are cosigning for a purchase, make sure you get copies of all important papers, such as the Truth-in-Lending Disclosure Statement, the loan contract, and warranties. You may need these documents if there's a dispute between the seller and the borrower. The lender is not required to give you these papers so you might have to get copies from the borrower.
It is very important to clearly understand, in full, the obligations by becoming a cosigner. Check with your state for current laws and consumer rights, if you are in need of additional information for cosigners, .