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What
Would Cosigning Mean for You?
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 are.
When you agree to cosign for someone
else's debt, you are essentially guaranteeing
payment if that person defaults. 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.
Cosigning Means You're Financially
Responsible - Consider the Risks
The obligations associated with cosigning
a loan can be more than people expect.
So before you put your autograph on
the dotted line agreeing to cosign
a loan, the Federal Trade Commission
requires the creditor to give you
information explaining your commitment.
It states:
"You are being asked to guarantee
this debt. Think carefully before
you do. If the borrower doesn't 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 part of your credit
record. This notice is not the contract
that makes you liable for the debt."
If you are thinking about cosigning
you should consider the following:
- Be sure you can afford
to pay the loan. If you're asked
to pay and you 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
home or car, be sure to understand
all the consequences. If the borrower
fails to pay, you could lose these
items.
- You may have to pay the
full amount of the debt if the borrower
does not pay. You may also have
to pay late fees or collection costs
in addition to the outstanding debt.
- Ask the lender to calculate
the money you might owe. You may
also negotiate specific terms of
your obligation.
- Ask the lender to agree,
in writing, to notify you if the
borrower misses a payment. Doing
this 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 the important contracts.
- Check your state law for
additional cosigner rights.
When Is It Worthwhile to Cosign?
When it's important to you that
the borrower get credit, and you
have good reason to believe the
borrower will repay the debt, it
can be worthwhile to cosign for
a loan or credit card.
Parents often cosign for their
adult children who have ample income
to qualify individually, but lack
a solid credit or employment history.
By cosigning, parents help their
children receive a loan and establish
credit in their own name.
Similarly, sometimes a spouse or
family member will cosign for a
small loan or credit line to help
an individual establish or rebuild
credit in their own name.
Although the statistics on cosigning
support that it's a relatively high
risk, that's not always the case.
There have been many successful
situations where cosigning served
the interests of all parties. Statistically,
though, the risk often outweighs
the benefit. Some studies show that
three out of four cosigners end
up having to repay the loan for
the original borrower, so it's important
to take steps to protect yourself
if you do cosign.
If you are worried about some of
the risks that cosigning carries,
you may be able to negotiate specific
terms of your obligation. For example,
you might want to have your liability
limited to paying 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: "The cosigner will be
responsible only for the principal
balance on this loan at the time
of default."
If You Need a Cosigner
If you're in need of someone to cosign
a loan for you, talk with family or
friends and explain to them that they'll
be helping you to reestablish your
credit. Understand that cosigning
is a big step for the person agreeing
to sign for you, so make sure you
make them feel as comfortable as possible
about cosigning for you. Show them
you'll be able to repay the loan.
Remember that if you fail to repay
the debt and the cosigner has to step
in to repay it but can't afford it,
then you both will have damaged credit
histories. Therefore, the credit you
obtain will carry a double weight
of responsibility - your obligation
to the lender to repay what you borrow
and your obligation to your cosigner
to live up to the investment they're
making in you.
Whatever your involvement in a cosigned
credit transaction, remember that
cosigning means extra obligations
for everyone involved and consider
your decision carefully. |
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