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Co-Signing a Loan

Money & Debt

This article explains what to consider before co-signing on a loan.

If you want to co-sign a loan, here is a quick summary to help you make a decision on whether or not you want to go through with this decision.

Before You Co-sign

Cosigning a loan is a big deal. You are guaranteeing that in case the borrower (the person requesting the loan) cannot make a payment, you as the cosigner will be on the hook for the amount they did not pay. Here are some things you need to keep in mind when considering cosigning on a loan.

How does co-signing affect me?

Co-signing a loan means you are on the hook if the borrower cannot make their payments. Unfortunately, according to the FTC (Federal Trade Commission), the majority of co-signers end up footing the bill.

When you cosign a lease, you are promising to be part of the lease term. Cosigners cannot pull out of the agreement during the lending term. When you cosign, whatever the loan was for, is now considered your debt, and this may limit your ability to get new credit. Because you are a cosigner, you are a co-borrower as well. This means there will be a credit inquiry, and it will impact your credit score just as if you were the primary borrower. Do not cosign if you do not have the means to make a missed payment for the borrower.

When you cosign a loan, you are signing a binding contract, that is legally enforceable if there is lack of payment.

However, cosigning is not all gloom and doom. If you do decide to cosign for someone and they are a really responsible borrower, making all of their payments on time and never missing a payment, cosigning will be a benefit to you. If the borrower is responsible, by giving their payments on time, they are building your credit. Remember, any cosigned debt is your debt too. Payments or lack of payments will reflect on your credit history.

Loan Co-signing Scenario

Judy wants to buy a vehicle. She needs it to get to work. Judy just graduated from college and does not have a job yet and does not have established credit. She asks her dad Dave to be a cosigner on the car note. Dave wants to help and agrees to sign for the car note. Judy gets approved for a car.

A couple of months later, Dave is informed that Judy has not been giving her car payments. She owes three months’ worth of payments. Because Dave is the cosigner, the Lender is requesting that Dave pay all of the missed payments on Judy’s behalf, including the late fees and collection fees.

Dave does not want to pay. When Dave cosigned the loan to help Judy get a car, he entered a contract with the Lender binding him to be financially responsible if Judy ever missed a payment. The Lender has a legal right to enforce this contract against Dave and force him to pay for Judy’s missed payments and any additional fees.

Cosigning a Loan FAQs from the Federal Trade Commission

See Cosigning a Loan FAQs: "When you cosign a loan for a friend or family member, you’re putting your own finances and creditworthiness on the line. Here’s what you need to know before you cosign a loan."

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