Co-Signing a Loan
Despite the risks, there may be times when you want to co-sign. Your child may need a first loan, or a close friend may need help. Before you co-sign, consider how it might affect your financial well-being.
- Can you 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. Creditors will consider the co-signed loan as one of your obligations.
- Before you pledge property to secure the loan, like your car, furniture or jewelry, make sure you understand the consequences. If the borrower defaults, you could lose these items.
- Ask the creditor to calculate the amount you might owe. The creditor doesn’t have to do this, but might, if you ask. You also may be able to negotiate 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 creditor to include a statement in the contract — like "The co-signer will be responsible only for the principal balance on this loan at the time of default." — before you co-sign.
- Ask the creditor to agree, in writing, to notify you if the borrower misses a payment or the terms on 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.
- If you're co-signing for a purchase, make sure you get copies of all important papers, like the loan contract, the Truth-in-Lending Disclosure Statement, and warranties. These documents may come in handy if there's a dispute between the borrower and the seller. The creditor doesn’t have to give you these papers; you may have to get copies from the borrower.
- Check your state law for additional co-signer rights.