Things to Know Before Cosigning a Loan

 

Cosigning a loan for someone is a big responsibility. Basically, what it means is that you are willing to take on the responsibility of paying off a loan that your friend or relative refuses or fails to pay off.  

 

One of the reasons you might be obliged to cosign for a loan is because the borrower happens to be your child, a relative or anyone close to you. As we have said, cosigning a loan is a big responsibility; you have to know the details of what you are going into for your sake and the sake of the borrower.

 

Listed below are 10 things to know before cosigning a loan. Knowing these things will help you decide more carefully if you are in capacity to cosign a loan. 

 

1. Cosigning a loan means that you are being asked to act as a guarantor to a debt, so think this over carefully. Make sure that the borrower has the capacity to pay off his debt. Also be sure that you can afford to pay if you have to, and if you want this responsibility in the first place.

 

2. Be sure that you have the financial capacity to pay the loan. Most of the time, even if you want to cosign the loan, the creditors won’t consider you if you are already indebted or in poor financial standing.

 

3. If after reading the contract there are some details still unclear to you, it is best to ask a lawyer to explain these things to you. Also scrutinize the notice that will be issued to you and the borrower. Under a Federal Trade Commission rule, creditors are required to give you a notice to help explain your obligations as a cosignatory.

 

4. As a cosignatory, the creditors might have to make you pay up to the whole amount of the debt if it is in the terms of the contract. You may also have to pay for miscellaneous fees and collection costs, which adds to the debt.

 

5. The lender can collect the debt from you without first trying to collect from the borrower himself. The creditor can use the same harassment tactics against you that can be used against your borrower, like suing you, garnishing your wages, etc. What’s worse, if the debt ever goes into default, it will become a part of your credit record.

 

6. When you decide to cosign a loan, even if you are not asked to repay the debt, your liability for this loan may keep you from getting other loans or credit that you may want.

 

7. Look up your state’s law. Other states have different provisions and some have laws giving you additional rights as a cosigner.

 

8. In some cases, you may be able to negotiate the specific terms of your obligation. For example, you might want to limit your liability to paying only the principal balance on the loan, excluding miscellaneous payables like late charges, court costs, attorneys' fees and such. Ask the lender to include these in a written agreement.