When you cosigning on a loan, you are personally guaranteeing another person’s debt. If the borrower does not repay the debt, you will have to do so, and you may not get that money back from the borrower. Below are some factors to consider before deciding to cosign a loan.
1. REALIZE THE FULL POTENTIAL OF YOUR EXPOSURE
A cosigner is not liable only for the amount of money that was borrowed originally, but can also be liable for any late fees, cancellation charges, interest or other obligations that the borrower might be required to pay. Understand the interest rates that may apply and how those rates might change if non-payment becomes an issue. Under the terms of the agreement, you may be forced to engage in arbitration of there is a dispute, or be sued in a court outside your local area. Remember, you are as liable as the borrower.
2. YOU ARE THE LIKELY TARGET OF A COLLECTOR
If the borrower is unable or unwilling to meet the obligations of the debt, the creditor does not have to go after the borrower first. In fact, if you are the person with the greater resources, you will be the most likely first target. The creditor can refer you to a collection agency, sue you, and garnish your wages and your bank accounts. The effects of the process can affect your credit record.
3. CAN YOU AFFORD TO PAY THE LOAN
This point may seem obvious, but you need to consider it carefully. If you do not think you can repay the loan if the borrower defaults, including interest and fees, then cosigning for the loan is a bad idea. Not only may you be sued, but also your own credit rating will take a hit. Defaulting on a cosigned loan is considered the same as defaulting on a loan you originated. Also, even if the borrower does not default, the cosigned loan may keep you from getting additional credit of your own if lenders see cosigned obligation on your credit report.
4. CONSIDER NEGOTIATING MORE FAVORABLE TERMS
A lender is not required to offer you special terms as a cosigner, but it does not hurt to ask. You can request the lender to limit your obligation in the event of a default by the borrower to a specific amount, or only for the principal amount of the loan. This would protect you from interest payments, attorney’s fees, court costs and late fees. You might also wish to offer security, such as a car or other valuable property. If the borrower defaults, you might lose the property, but you will avoid having to pay out a larger sum.
5. GET COPIES OF EVERYTHING
Because you are in the same position as the borrower, you need to have copies of all the paperwork that the borrower receives. This would include the contract, the Truth in Lending forms, warranties, pay schedules and all correspondence. Make sure that the lender copies you on all letters and notices that go to the borrower. Such copies will alert you if the borrower is falling behind on payments, and give you an opportunity to work out an arrangement with the lender, if necessary.
6. BE HONEST ABOUT THE BORROWER
This step may be the hardest to do, but it is necessary. Think long and hard about the reliability of the borrower. Such an honest assessment may be difficult because most cosigners are approached by family members or good friends, and is not easy to refuse a request. Yet, the relationship may be damaged even more after a defaulted loan than it would be if the request is denied in the first place. No one is served well if you undertake an obligation with reservations, and then have to face a serious financial hit due to the inability of the borrower to pay on the loan.
Cosigning a loan is a serious matter. It carries significant risks, but at times it may be the right decision. Following the steps outlined above will make the decision easier and more informed.
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