David William Jordan

Attorney & Counselor at Law

The Dangers of Co-Signing A Loan


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Under federal law, creditors are required to give you a notice that explains your obligation.  It will say:

  1. You are being asked to guarantee this debt.

  2. If the borrower does not pay the debt, you will have to.

  3. You may also have to pay late fees or collection costs.

  4. The creditor can collect this debt from you without first trying to collect from the borrower.

  5. If this debt is ever in default, that fact may become a part of your credit report.

    The Odds Are Against You

    Studies of certain types of lenders show that for co-signed loans that go into default, as many as three out of four co-signers are asked to repay the loan.  Remember, when you are asked to co-sign, you are being asked to take a risk that a professional lender won't take.  If the borrower met the criteria, the lender would not require a co-signer.  Lenders usually know what they are doing and if they won't take the risk, should you?

    Seven Things To Do If You Co-Sign

    Despite the risks, there may be times when you want to co-sign.  Your child may need a first loan, or a close friend may need help.  Before you co-sign, consider this information:

    1. 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.

    2. Even if you're not asked to repay the debt, your liability for the loan may keep you from getting other credit because creditor will consider the co-signed loan as one of your obligations.
    3. 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.

    4. Ask the lender to calculate the amount of money you might owe.  The lender isn't required to do this, but may if asked.

    5. Try 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 co-signer will be responsible only for the principal balance on this loan at the time of default."

    6. 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.

    7. 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 co-signing 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.
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