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Credit Reporting & Scoring
Personal Loans
Cosigning A Loan
Cosigning A Loan
What would you do if a friend or relative asked
you to cosign a loan? Before you answer, make sure you understand what
cosigning involves. Under federal law, creditors are required to give you
a notice that explains your obligations. The cosigner’s notice states:
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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.
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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.
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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.
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This notice is not the contract that makes you liable for the debt.
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* Depending on your state,
this may not apply. If state law forbids a creditor from collecting from a
cosigner without first trying to collect from the primary debtor, this
sentence may be crossed out or omitted altogether.
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.
- Check your state law
for additional cosigner rights.
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