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Co-signing a Loan...
What would you do if a friend or relative asked you to cosign a
loan? Before you answer, make sure you understand what cosigning
involves. Under federal law, creditors are required to give you a
notice that explains your obligations. The cosigner’s notice states:
You are being asked to
guarantee this debt. Think carefully before you do. If the
borrower does not pay the debt, you will have to. Be sure you
can afford to pay if you have to, and that you want to accept
this responsibility.
You may have to pay up to the full amount of the debt if the
borrower does not pay. You may also have to pay late fees or
collection costs, which increase this amount.
The creditor can collect this debt from you without first
trying to collect from the borrower.* The creditor can use the
same collection methods against you that can be used against
the borrower, such as suing you, garnishing your wages, etc.
If this debt is ever in default, that fact may become a part
of your credit record.
This notice is not the contract that makes you liable for the
debt. |
* Depending on your state, this may not apply. If state law
forbids a creditor from collecting from a cosigner without first
trying to collect from the primary debtor, this sentence may be
crossed out or omitted altogether.
Cosigners Often Pay:
Studies of certain types of lenders show that for cosigned loans
that go into default, as many as three out of four cosigners are
asked to repay the loan. When you're asked to cosign, you're being
asked to take a risk that a professional lender won't take. If the
borrower met the criteria, the lender wouldn't require a cosigner.
In most states, if you cosign and your friend or relative misses
a payment, the lender can immediately collect from you without first
pursuing the borrower. In addition, the amount you owe may be
increased — by late charges or by attorneys’ fees — if the lender
decides to sue to collect. If the lender wins the case, your wages
and property may be taken.
If You Do Cosign:
Despite the risks, there may be times when you want to cosign. Your
child may need a first loan, or a close friend may need help. Before
you cosign, 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.
Source
= Federal Trade Commission
Consumer Credit Info Index
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