If you turn down a relative's request to borrow some cash, they may ask you to co-sign a loan instead. This may sound like a harmless alternative, but there are serious repercussions to consider.
Co-signing a loan isn't a mere character reference. If the borrower does not pay you are fully liable for the loan. This means you need to be in a position to make the loan payments if the borrower cannot.
You also may be liable for any late fees or collection costs.
So before co-signing a loan, remember these points from the Federal Trade Commission.
- In many states, the lender can collect the debt from you as the co-signer without first trying to collect from the borrower if a payment is missed.
- Lenders generally can use the same collection methods against you as against the borrower, such as suing you or garnishing your wages.
- If the debt is ever in default, it may become part of your credit score.
- Even if you're not asked to repay the debt, your liability for the loan may prevent you from securing other loans or credit.
- Try negotiating the specific terms of your obligation. For instance, ask to limit your liability to the principal on the loan and exclude late charges, court costs or attorney fees. Ask the lender to include a statement in the contract similar to: "The co-signer 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. This will give you time to deal with the problem immediately and potentially avoid any late fees.
- Ask the lender to calculate the amount of money you could potentially owe. The lender isn't required to do this, but may if asked.
- Get copies of all important papers such as the loan contract and any supporting documentation, and warranties if you're co-signing for a purchase. Since 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 co-signer rights.
Source: The Federal Trade Commission