Co-Signing a Loan
Have you been asked to co-sign a loan? Are you thinking about asking a family member or friend to co-sign a loan for you? Before you co-sign or ask someone to co-sign for you, understand the risks.
Before you co-sign or ask someone to co-sign for you:
Make sure the loan is affordable to the co-signer. Whomever co-signs may be asked to repay the loan.
Understand that co-signors are liable for the loan, which may be factored into other lending decisions.
Understand that the co-signor's credit could be damaged if the primary borrower is delinquent with or defaults on the loan.
When you co-sign for a loan, the lender will give you a notice that spells out the risks. It will include the following statements:
- You are being asked to guarantee this debt. If the borrower does not repay the debt, you will have to. Be sure you can afford to pay if necessary 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. Depending on the laws in your state, this may not apply. If state law forbids a creditor from collecting from a co-signer without first trying to collect from the primary debtor, this sentence may be crossed out or omitted.
- The creditor can use the same collection methods against you that can be used against the borrower, including suing you or garnishing your wages.
- If this debt is ever in default, that fact may become a part of your credit record.
Ask the creditor to agree, in writing, to notify you if the person you co-sign for misses a payment or the terms of the loan change. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately. You may also want to make sure this protection is in place if you are thinking about asking someone to co-sign for you.