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March 1997
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.
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.
This notice is not the contract that makes you liable for the
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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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