What would you do if a friend or relative asked you to cosign a loan? Before you answer, make sure you understand what cosigning involves. Under federal law, creditors are required to give you a notice that explains your obligations. The cosigner's notice states:
* Depending on your state, this may not apply. If state law forbids a creditor from collecting from a cosigner without first trying to collect from the primary debtor, this sentence may be crossed out or omitted altogether.
Studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. When you're asked to cosign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a cosigner.
In most states, if you cosign and your friend or relative misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased — by late charges or by attorneys' fees — if the lender decides to sue to collect. If the lender wins the case, your wages and property may be taken.
Despite the risks, there may be times when you want to cosign. Your child may need a first loan, or a close friend may need help. Before you cosign, 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.
- When you sign your name as co-signer in Ohio, you're in effect becoming a potential borrower as well, says the Federal Trade Commission. If the person who asked for your help can't make his payments, you're legally responsible for making them. Because of this, you should only sign your name on the dotted line if you can afford the financial burden, if it should ever fall to your shoulders. Also, signing your name can have an effect on you even if the person never defaults, because future lenders will see that you co-signed a loan and will consider it as your financial obligation. You may be turned down for loans if lenders feel you've overextended yourself.
- Let's say the original borrower had all the best intentions in the world, but she lost her job and can no longer afford payments on the car loan you co-signed on. The loan company has the legal right in Ohio to actively pursue you for the payments. According to the Federal Trade Commission, this means the company can sue you and have a judgment decided against you in court, which has a devastating impact on your credit report. It can also force you to reveal your assets.
- If you've co-signed a property loan in Ohio, such as for a car, home or apartment, you'll have no legal right to take over the property or sell it unless your name is on two pieces of paper: the loan and the property title. Having your name on the title means you can decide to take the item as your own when the borrower defaults or sell it to pay off the debt, says Lawyers.com.