Warning! Don’t Cosign for a Loan Unless You Can Afford to Pay It
Cosigning on a loan for a family member or friend can take just a few moments to do, but can take years to be undone. Under federal law you have to be given a notice that explains the details of cosigning a loan at the time of the agreement, but most people probably never read it. It states:
“You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not 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.”
Why Cosigning is a NO NO
This notice pretty much explains how bad things can get, and I believe deep down most people are reluctant to cosign. However many grudgingly choose to do so, feeling guilty after their family member begs and explains that they must have that shiny new lemon parked at the dealership.
The only reason a person would need a cosigner is because they have bad or no credit. So if the person is not creditworthy or has no credit history, why would you want to put your credit on the line to back them?
The Federal Trade Commission states that 75 percent of cosigners are put on the hook to repay loans that have gone into default. In most states lenders can start attempting to collect from the cosigner immediately after the primary borrower misses their first payment. And any negative impacts from the loan will directly affect cosigner’s credit.
Until the loan you have cosigned is paid off, it will linger on your credit report. Even if the person is paying on time, cosigning a loan can prevent you from attaining your own financial goals. For example, if you already have one mortgage in your name, lenders may think that a second mortgage will make your debt to income too high and deny you for your loan.
The Only Time to Cosign
With many African Americans getting hit the hardest by the subprime mortgage crisis, having a family member in need of your signature may occur more frequently than in the past. So if your kid needs you to cosign for a student loan or your mother wants you to cosign on a car, you may feel obligated to do so. But you should only act if you can afford the payments. This way if the primary borrower defaults it won’t ruin your credit.
Also, make sure you keep tabs on the loan by getting copies of all the important documents and having statements sent to your address as well. In addition, before you sign, be sure to check with your state to learn about your rights as a cosigner.
And if you can’t afford to cosign, just say NO. The only way you can really help your family and friends is by being in a position of power. If you are in the same boat they are in, strained and stressed by bills and bad credit, then you won’t be able to lead by example. Keep away now and extend the resources you do have if they really need you in the future.