Co-Signing Dangers

Dangers, What Dangers?

Most people want to be helpful to friends and relatives when possible. One of the ways you may be asked to help someone is to co-sign on a loan for your friend or a member of your family. However, if the borrower defaults on the loan, such a noble gesture can place you in financial difficulty. Therefore, there are some Questions to Ask Before Co-Signing. 

There are some potential risks and you should consider before you co-sign. You are not just vouching for a person, you are agreeing to satisfy the loan if the borrower cannot.

Under federal law, the lender is required to notify you of the following before you co-sign on a loan.

"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 debt."

You Should Consider The Loan as Your Loan.

When you co-sign on a loan you become personally accountable for the repayment of the loan. If the borrower is unable to make the payments, the co-signer must make those payments. Before co-signing, you should ask yourself, can I affort to make the payments if my relative or friend cannot? Studies have shown that three out of four co-signers are required to pay off the loans that go into default.

Some people in co-signing think they have only recommended the borrower to the lender. They do not understant that the co-signer has legal obligations. Co-signers should understand that they have become legally liable for the payment of the loan and treat the loan as their own.

Consult An Attorney

Seek the advise of an attorney so you will be aware of your rights as a co-signer. Consider having an attorney draft an agreement between you and the primary borrower. In some states the lender is authorized to contact the co-signer before contacting the primary borrower when a loan payment is delinquent.

Make sure you know your rights and obligations as a co-signer.

How Will It Affect Your Credit

A co-signer's credit is adversely affected if the borrower does not make the payments on time. 

Monitor The Loan

The co-signer is liable for the loan. Therefore, you, the co-signer should take personal responsibiltity to see that the loan payments are made. Monitor the status of the loan online if possible. Ask the lender to send you a monthly statement. Request the lender to notify you if the account becomes past due. 

Act as if this is your own loan, because it is and you are on the hook for repayment.

Relationships Are Often Damaged

If your friend or relative is unable to honor the the agreement, he/she may be embarrassed to face you than try to avoid contact with you. Your relationship may become awkward and difficult because of the loan status. Family relationships have been damaged and friendships have been ruined over deliquent co-signed loans. 

Read The Basics Of Co-Signing A Loan before doing anything.

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