Co-Signing Into Debt
Never co-sign a loan for which you do not agree to be held responsible.
STEVE LOVEJOY: It is just as if you are the borrower because you are, even though you do not get the benefit of the proceeds of the loan.
PETER HOLLAND: The reason they want your signature is because if your friend defaults on that loan and stops paying, then they have you to come after for the full balance of that loan.
ELIOT WAGONHEIM: Co-signing a loan is a lot more than a favor. Co-signing a loan should be viewed as you are making the loan yourself.
STEVE LOVEJOY: And if it is a person who you suspect may default on the loan, then you should budget accordingly that you would pickup those payments.
ELIOT WAGONHEIM: Because what you are saying is, if this guy, if my friend does not pay, I will and you have got to be prepared for that.
STEVE LOVEJOY: If he does not pay, then not only will a creditor perhaps come after you and want you to make the payments on that obligation, but also will report that delinquent to your credit report. So, his delinquency may affect you.
PETER HOLLAND: By co-signing, you are agreeing to full liability not necessarily are you getting any benefit out of it.
STEVE LOVEJOY: Would you be able to go after your friend to recoup those amounts? The answer is yes, but you really will not have to do that?
ELIOT WAGONHEIM: If you do not have the financial resources to pay him or would really strap you or it would make you angry to pay, then you do not co-sign it.
TEVE LOVEJOY: I have not co-signed, for example, my children's student loans.
PETER HOLLAND: If it is your spouse or your child and you are trying to help them out, out of love and you are willing to put yourself on the hook for 100%, go for it.
STEVE LOVEJOY: But I understand, that if they do not make the payments when they get out of school, the creditor is going to come looking for me.
All they want is your signature. When you sign your signature, the bank looks at that and they say all we want is for you to be 100% liable on that debt.
STEVE LOVEJOY (Business Lawyer): Sometimes the best policy is to not get involved in the first instance.
"But all they want is my signature, right?"
Well, perhaps your friend or relative just wants your signature, but the lender wants you. Your signature is much more than an autograph. It's an autograph with serious consequences.
If you bother to read the lines above your signature, the language contained in it might just give you pause:
You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that 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, 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, that fact may become a part of your credit record.
Wow, this means that by helping your buddy overcome his credit problems in getting a loan, you could wind up with bad credit of your own. Though some states forbid creditors from collecting from co-signers without first trying to collect from the primary debtor, your signature as a co-signer puts you on the hook for the debt.
Cosigners Often Pay
Studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. When you're asked to cosign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a cosigner.
In most states, if you cosign and your friend or relative misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased (by late charges or by attorneys fees) if the lender decides to sue to collect. If the lender wins the case, your wages and property may be taken.
If You Do Cosign
Despite the risks, there may be times when you want to cosign. Your child may need a first loan, or a close friend may need help. Before you cosign, consider this information:
- Be sure you can afford to pay the loan. If you're asked to pay and can't, you could be sued or 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 because creditors will consider the cosigned loan as one of your obligations.
- Before you pledge property to secure the loan, such as your car or furniture, make sure you understand the consequences. If the borrower defaults, you could lose these items.
- Ask the lender to calculate the amount of money you might owe. The lender isn't required to do this, but may if 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, court costs, or attorneys' fees. 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 deal with the problem or make back payments without having to repay the entire amount immediately.
- Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties if you're cosigning for a purchase. You may need these documents if there's a dispute between the borrower and the seller. The lender is not required to give you these papers; you may have to get copies from the borrower.