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:
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:
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.
No Credit Card Required
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.