Cosigning a loan; co-signing

By Jeff Sanders  [January 24th, 2011]

Many people agree to cosign loans for friends or relatives, as a favor, as a vote of confidence, or because they just can't say no. Unfortunately, they often find that they've bitten off more than they intended to chew.

The cosigner of a loan agrees to be responsible for its repayment along with the borrower. While a lender will generally seek repayment from the debtor first, it can go after the cosigner at any time. (On the other hand, where a loan is guaranteed, the lender can usually go after the guarantor only after the principal debtor has actually defaulted.)

Finance companies report that most cosigners end up paying off the loans they've cosigned—along with late charges, legal fees and all. Not only is this an unwanted out-of-pocket expense, but it can also be an undeserved blot on the cosigner's credit record.

It's better to guarantee a loan than to cosign it. However, if you're willing to cosign a loan, at least seek the lender's agreement to refrain collecting from you until the borrower actually defaults and try to limit your liability to the unpaid principal at the time of default. Then stay on top of the borrower's financial situation to help avoid a default (for example, have the lender notify you whenever a payment is late). At least you can preserve your credit rating by nipping payment problems in the bud.

Cosigning An Account. You may be asked to cosign an account to allow someone else to obtain a loan. With cosigning, your payment history and assets are used to qualify the cosigner for the loan.

TIP: We recommend that you think carefully before cosigning a loan, whether for a family member, friend, or employee. Many have found that cosigning a loan only leads to trouble.

Bear in mind that cosigning a loan bears all the financial and legal consequences of taking out the loan yourself. When you cosign, you are signing a contract that makes you responsible for the entire debt. If the other cosigner does not pay, or makes late payments, it will probably show up on your credit record. If the person for whom you cosigned does not pay the loan, the collection company will be entitled to try to collect from you.

If the cosigned loan is reported on your credit report, another lender will view the cosigned account as if it were your own debt. Further, if the information is correct, it will remain on your credit report for up to seven years.

TIP: If someone asks you to cosign a loan, suggest other alternatives–such as a secured credit card—by which they can build a credit history. If you are asked to cosign for someone whose income is not high enough to qualify for a loan, you are actually doing them a favor by refusing—they will be less likely to be overwhelmed by too-high debts. At any rate, consult with your lawyer before cosigning, since state laws regarding a cosigner's liability vary. TIP: If you have already cosigned for someone, and he or she is not making payments on time, consider making the payments yourself and asking the cosigner to pay you directly, in order to protect your credit rating.

See also...

Debt Collection

Business and Finance Law