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The Danger Of Cosigning On a Loan

Jan 12, 2008
Cosigning on a loan can be a great way to help a family member or close friend when they need help, but it can also be a great way to ruin your own credit if things do not work out.

Before you decide to cosign on a loan, you should always read the cosigning agreement that lenders have for these. By law, the lender must show you a copy of the agreement before you sign for the loan. In some states this is called a cosigner's notice.

The cosigner's notice usually contains language such as this:

As cosigner for the loan, you are being asked to guarantee this debt. You should consider this carefully before you do it. If the borrower does not pay the debt as agreed, you will have to pay it. You should be sure that you can afford to pay if you have to, and that you want to accept this responsibility as cosigner.

As cosigner for the loan, you may have to pay the full amount of the debt if the borrower does not pay. In addition, as cosigner you may also have to pay any late fees or collection costs.

The lender may collect this debt from you without first trying to collect from the borrower (in some states where this is allowed). In addition, the lender may use the same type of collection methods against you as he might use against the borrower. This might include garnishing wages or suing you. You should also know that if this debt goes into default, that issue may become a part of your credit record.

Before you agree to cosign for a loan, keep in mind that some studies have shown that as many as 75 percent of cosigned loans go into default at some time, and that the cosigners are then asked to pay. A good rule of thumb to remember is that when you are being asked to cosign on a loan you are being asked to assume a risk that the lender would not take.

Cosigners should also understand that in most states if the person you signed for does not make the payments on the loan the creditor can immediately begin to collect from you. This can be done without the creditor having to first track down the person you cosigned for. You will be made to pay any fees or attorney's fees if there are any. Lastly, the wages from your job or your own personal property can be seized as payment.

It is true that there are many risks involved with cosigning for a loan, but even so there may be times when you feel comfortable doing it. Perhaps your child needs to establish credit or a family member may have been forced into a hard temporary hardship. Before you sign consider the payments on the loan if you have to make them. Can you afford it?

Remember that this loan may keep you from getting your own loans until it is paid off. Future creditors will consider a cosigned loan as one of your debt obligations.

It is usually a very good idea to ask the creditor, in writing, to notify you if the borrower misses a payment. This will allow you some time to deal with the problem or make back payments without having to repay the entire amount immediately.

You also want to make sure that you get copies of all the important documents associated with the loan. Do not be timid about asking for these. You may need them later on.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Cheap Loans and Debt Consolidation Loan
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