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Cosigning
A Loan
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:
- 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.
* 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.
For More
Information
For a free copy of
Best Sellers, a complete list of FTC publications, contact:
Public Reference
Federal Trade
Commission
Washington,
D.C. 20580
(202) 326-2222; TDD: (202) 326-2502
11/92; 1/88; 12/85;
12/82; 1/79
Reproduced
with permission from The Federal Trade Commission.
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