Dangers of Co-Signing a Loan

Should I co-sign a loan? What happens when I co-sign? If I decide to co-sign despite the risks, what should I do? This document answers these questions.

Should I co-sign a loan?

• Only if you understand just what risks you are taking

What happens when I co-sign?

• You are just as liable on the debt as the original borrower. 
• You are promising to pay if the borrower doesn't pay in full.
• You are saying that you will pay any late fees, lawyer fees and other charges. These charges can increase what you owe. Sometimes, by a lot.
• You are saying that the lender can try to get you to pay without first trying to get the borrower to pay.
• You are saying the lender can sue you if the borrower does not pay.
• You are tying up your credit. It could keep you from getting credit you need.
• You are putting your credit record at risk. If the borrower doesn't pay in full, this hurts your credit record.

If I decide to co-sign despite the risks, what should I do?

• 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. You could also lose money, your house or other property.
• Ask the lender to put a limit on what you could owe. You may be able to get the lender to agree not to make you pay late charges, court costs, or lawyer fees. If so, make sure the contract says something like: "The co-signer will be responsible only for the principal balance on this loan at the time of default."
• Get the lender to give you something in writing saying it will let you know if the borrower misses a payment. That will give you time to deal with the problem.
• Make sure you get copies of all important papers. These include the loan contract, the Truth-in-Lending Disclosure Statement and any warranties.

• You should seriously consider whether or not to cosign on a loan.
• Whether the person is a close family member or not, the loan will affect your financial abilities. It may also affect your relationship with the person you cosign for.
• You may not want to cosign for someone who is not even a close family member or friend. 

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