Cosigning a Loan

What would you do if a friend or relative asked you to cosign a loan? One law school professor defined "co-signer" as "an idiot with a fountain pen." Before you give your answer, make sure you understand what cosigning involves.

Warning Under a Federal Trade Commission rule, creditors are required to give you a notice to help explain your obligations as a cosigner. The cosigner's notice says: "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 a part of your credit record."

Several points are worth highlighting:

• The lender does not have to "chase" the borrower before coming to you for repayment--you are on the hook every bit as much as the borrower.
• It is your loan, even if your won't have any use or enjoyment from the property. If there is a default, you will have to pay the obligation, in full, plus any "expenses" of collection.
• The lender does not feel confident that the buyer will be able to repay, or it would not be requesting a co-signor. That means the lender already has you in its sights, the minute you pick up that pen to co-sign.

If after considering all of this carefully, and you do cosign:

• Make sure you can afford to pay the loan--because the odds are very high that you will have to do so. If you are asked to pay and cannot, you could be sued or your credit rating could be damaged.
• Consider that even if you are not asked to repay the debt, your liability for this loan will appear on your credit record. Having this "debt" may keep you from getting other credit that need or want.
• Before you pledge property, make sure you understand the consequences. If the borrower defaults, you could lose your property.