Precautions for Co-signers
Lenders require a co-signer when a consumer doesn’t qualify for a loan, either due to a lack of credit history or poor credit history. A co-signer is an individual who meets the loan requirements and agrees to cover the loan payments if the borrower requesting the loan is unable to make them.
The decision to co-sign a loan – or to ask a loved one to co-sign for you – shouldn’t be taken lightly. You must carefully weigh the pros and cons and take an honest assessment of your ability to pay back the loan in the future.
According to the Federal Trade Commission, numerous lender studies show as many as three out of four co-signers are ultimately asked to repay the loan. Co-signers who fail to examine the fine print may be stunned when they’re stuck with the bill. Not only can this cause a serious financial hit, it can strain personal relationships.
Prior to co-signing any agreements, consumers need to educate themselves on the facts and potential consequences.
Did you know?
- Once you co-sign a loan, there’s no going back. Co-signers cannot pull out of the loan midway through the term. They must take unexpected events into account, such as divorce or job loss, before signing.
- Co-signing a loan for someone else may prevent you from obtaining credit for yourself. Lenders consider co-signed loans as one of the borrower’s credit obligations, even if they aren’t making the payments. The liability can prevent co-signers from qualifying for another loan or credit card.
- If you co-sign a loan, you may be required to pay more than the loan amount. If a borrower skips one or more payments, late fees and collection costs can also be forwarded to the co-signer. Additionally, the co-signer may need to pay attorney fees if legal action is required.
- Lenders can garnish the wages of co-signers. If the borrower and co-signer cannot repay a loan, the lender can sue the co-signer to garnish wages and even property in order to satisfy the repayment.
- Co-signers can lose their property if the loan defaults. If a co-signer secures a loan with property, such as a home or vehicle, the co-signer risks losing those items if he/she is unable to make payments when required.
If you do choose to co-sign a loan for a family member or friend, there are steps you can take to limit potential problems. Keep copies of all paperwork on hand in case disputes arise, and ask the lender to notify you in writing if the borrower ever skips a payment. This move can prevent a trail of extra fees.
Co-signer rights can vary state-to-state, so make sure you research what you’re entitled to ahead of time, and what you’re not.