What You Need to Know about Co-signing on a Loan

When friends and family ask you to co-sign on a loan you might think you’re doing them a favor, but you’re actually entering into some risky business.

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Tips from the Federal Trade Commission:

If you do choose to co-sign on a loan, the FTC warns that you should consider this information:

  • 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.
  • Even if you’re not asked to repay the debt, your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations.
  • Before you pledge property to secure the loan, such as your car or furniture, make sure you understand the consequences. If the borrower defaults, you could lose these items.
  • Ask the lender to calculate the amount of money you might owe. The lender isn’t required to do this, but may if asked. You also may be able to negotiate the 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 lender to include a statement in the contract similar to: “The cosigner will be responsible only for the principal balance on this loan at the time of default.”
  • Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
  • Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties — if you’re cosigning for a purchase. You may need these documents if there’s a dispute between the borrower and the seller. The lender is not required to give you these papers; you may have to get copies from the borrower.
  • Check your state law for additional cosigner rights.
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