According to the Federal Trade Commission, “Of the co-signed loans that default – 75% of them have to be repaid by the cosigner.” What that means is that if you decide to co-sign on a loan for someone, there is a three out of four chance that YOU will end up paying back the loan and NOT the borrower.
So, what should you do if someone asks you to co-sign on a loan? Dorethia Conner, owner of Conner Coaching, which offers personal and business financial coaching, cautions, “Don’t do it!” There is some questionable financial misinformation out there about co-signing so Conner spoke with BlackEnterprise.com to help bring some clarity to the issue and answer some key questions.
What does it mean to co-sign?
When somebody co-signs on a loan they are legally agreeing to make the payments (including late fees and attorney fees) should the loan go into default. It’s a legally binding document; that’s why it’s so hard to get out of explains Conner. Please understand that co-signing is not a reference, a favor, and you are not just a back up; you are legally responsible. Bottom Line: Never co-sign on a loan for anyone unless you are prepared to pay back the entire amount on your own.
What does it mean when a borrower needs a co-signer?
“When you need a co-signer that signals that you don’t need to be borrowing any money,†says Conner. Essentially it indicates that the borrower does not have any credit history, poor credit history, or a history of not paying bills on time. This is why almost all states require a co-signer to be told in writing of the risks of co-signing for someone; the co-signer is being asked to guarantee the debt.Does co-signing affect my credit?
Yes! When you co-sign on a loan it will show up on your credit report. For example: If you co-sign on a car or a home and the car is repossessed or the home goes into foreclosure, that will appear on your credit report for seven years. But Conner says that it is important to understand that just because you are the co-signer, does not mean that you are part owner. Therefore you cannot push the sale of the home or car to get the funds to pay the lender because you don’t own it. You are simply a guarantor of the debt.
How do I say no?
Most people who co-sign do it for an emotional reason explains Conner. Saying no to family and friends can be tough but Conner suggests being honest and upfront. Here is an example of how you
can respond:Â I believe that you will be able to make these payments but if you don’t, I can’t. This is not something that I feel comfortable doing because if there is a month or two you can’t make the payments, I know they’re going to come after me. Conner also suggests sharing some of your financial goals with the borrower such as trying to buy a house in the next year or so, purchasing a car, or hitting a savings goal.What if I already co-signed? Am I stuck?
For some of you, this information may be coming a little late. But don’t fret, Conner says that if it has been two years and the person has made their payments on time you can ask the borrower to refinance and take your name off the loan. Also, if you’re already in it or plan to co-sign (which we don’t recommended) you can also have an attorney write up an agreement or contract stating what your responsibility is and what the borrower’s responsibility is as well as what steps you will take in the event that they don’t pay back the loan. You’ll still be required to pay back the loan should the borrower default but at least now you can go after them in court and get your money back, Conner says.
Continue reading on next page for what to do if you decide to move forward as co-signer
Tips from the Federal Trade Commission:
If you do choose to co-sign on a loan, the FTC warns that you should 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.