What Would You Do If Someone Asked You To Cosign A Loan?

Published on Feb 25, 2015 11:23 am

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 could be. When you cosign a loan, you’re agreeing to repay the lender if the primary borrower defaults. You’ll be assuming the debt and all the credit implications associated with taking on more debt, which could be significant.

It’s a serious responsibility, which is why federal law requires lenders to provide cosigners with a written notice of their potential obligations: according to the Federal Trade Commission, the notice must specifically state that if the borrower defaults, the cosigner will be expected to repay the loan, whether it’s an auto loan, a mortgage, or other type of loan. According to the notice, if a borrower defaults the lender can:

  • Require you to pay the full amount the borrower hasn’t repaid
  • Ask you to pay late fees or collection costs that will increase the amount owed
  • Hold you responsible for the debt even if they haven’t tried to collect it from the borrower first – provided the laws of the state allow them to do so
  • Use collection methods to get the debt from you, including turning you over to a collection agency, suing you or garnishing your wages
  • Report your failure to pay to the credit reporting agencies

Consider Before You Cosign

If, after reviewing the cosigner’s notice (and in light of any prior discussion), you decide to go ahead and cosign the loan, you may want to ask yourself these questions first:

  • If I had to shoulder the balance of the loan, could I afford to repay?
  • How will it affect my credit report if I can’t afford to repay the loan?
  • Will the cosigned loan (which appears on the credit report of both the borrower and cosigner) adversely affect my credit, and potentially limit my ability to get credit for myself?
  • Will I need to pledge my own personal property (a car or home) to help secure the loan?
  • If the borrower defaults, how much will I need to pay and are the terms negotiable with the lender?
  • Will the lender agree to notify me in writing if the borrower fails to make a payment?
  • What are my rights and obligations as a cosigner under federal and state laws?

When Should You Cosign?

Poor credit behaviors and a low credit score are far from the only reasons why someone might need a cosigner in order to secure a loan. Perhaps a young adult has a good job and responsible saving and spending habits, but not enough credit history to qualify independently for a loan. A college student may need a parent’s signature to secure a student loan. Sometimes a newly single spouse lacks the independent credit history he or she needs to qualify for a credit card on their own.

Cosigning a loan can help a beloved individual establish or rebuild credit in his or her own name, but it does come with significant responsibility and risks. Before you agree to cosign, thoroughly discuss the risks, benefits, expectations and potential outcomes with the borrower. In the end, only you can decide if the benefits are worth the risk.

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This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.


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