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Cosigning a Loan

Is Cosigning a Loan Beneficial to You?

Cosigning a loan for a friend or relative may seem like a simple act of kindness, but it is certainly not something to take lightly.  Many people believe that all that is required of them is a signature on loan paperwork, and they need never think about it again.  The truth is, once you put your name on that loan, you are guaranteeing that you will pay it back if the original loan holder defaults.

A person may need a cosigner for a variety of reasons, such as having bad credit, no credit history, or insufficient income. In these types of scenarios, financial institutions are not willing to take a chance on loaning money, unless someone with more stable credit can be added as a guarantee that the loan will not default.

A cosigner takes the full burden of the debt but receives none of the benefits.  For example, if you were to cosign a vehicle loan and the original loan holder stops paying, you would be responsible for making the payments, as well as any other accrued debt such as late fees, but you have no right to the title or ownership of the vehicle. 

The status of the loan will be reported to the credit bureaus as if it is your debt.  If the person for whom you cosigned defaults or makes late payments, it would lower your credit score.  It could also keep you from acquiring credit on something you desire, since you are ultimately responsible for the loan, even if you never have to pay on it.

According to the Federal Trade Commission, cosigners must be provided with paperwork detailing the responsibilities involved.

“Notice to Cosigner

You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn’t pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for debt.”

If you are asked to cosign a loan, take all the facts into careful consideration before coming to a decision.

If you have questions and do not know what to do, please feel free to contact us.  We would be happy to discuss options and what we think you should consider before signing your name to a loan.