Articles on Loans | Topics: loans, loan, loaning
by Will Underwood
Glutton for Punishment? Co-sign a Loan
Someone you know - a friend, perhaps - desperately needs to buy a new car. She asks you to co-sign a loan for her, pledging wholeheartedly to pay it off herself. What do you do? Before you decide to sign on the dotted line, make sure you're aware of the possible consequences of co-signing a loan.
Why do some people need a co-signer in the first place? In most cases, the lending institution has determined that your friend is not eligible to receive the loan. This could be due to several reasons. Maybe your friend has not established enough credit history to qualify for such a loan. Or, in the worse case scenario, your friend's credit history has been deemed risky enough to be denied the loan. In any case, the bottom line is that your friend was considered a lending risk, and thus, is not able to get the loan on her own. That's where you come in.
Before you make a decision, know that the Federal Trade Commission has reported that, in cases where a loan goes into default, as many as three out of four co-signers are ultimately deemed responsible for repayment. These figures were derived from studies conducted among certain kinds of lenders, but you should keep the possibility of repaying the loan in mind if you decide to co-sign.
What other risks may you face if you decide to co-sign? In many states, if the borrower misses a payment, the lender can go straight to you. You may be responsible for late charges and attorney's fees, and you run the risk of losing any collateral you may have set against the loan. In some cases, your wages could be garnished, or you may even face a lawsuit. Even if you avoid these risks, the loan you co-signed most likely will appear on your credit report as a credit liability. This could eventually lower your credit score, which may hamper your ability to gain access to credit if you plan to make any large purchases during the life of the loan.
If you're still contemplating whether to co-sign, consider whether you would be able to pay off the loan on your own, in the case that your friend defaults. Even if your friend is reliable and gainfully employed, there is always the distinct possibility that she could somehow become unable to continue making payments. Are you willing and able to continue making payments if that were to happen? If you imagine this type of scenario would cause you great financial burden, perhaps you are not the best candidate to co-sign.
| Historical Quote |
The private citizen, beset by partisan appeals for the loan of his Public Opinion, will soon see, perhaps, that these appeals are not a compliment to his intelligence, but an imposition on his good nature and an insult to his sense of evidence.
| —Walter Lippmann (1889–1974) |
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But if you ultimately agree to co-sign on a loan, there are some precautions you can take to make the process as easy and painless as possible. First, read over all documents carefully. Understand what kind of loan you are signing for, and all the terms for the loan. Ask the lender to clarify anything that you don't understand, or that seems ambiguous. Also, make certain to get copies of all paperwork.
Most importantly, try to establish some specific terms with the individual you are co-signing for and the lender. One important term to establish is that you should only be responsible for the primary balance. This will help you avoid any late charges that may stem from the original balance. Also, in the case that the lending institution decides to sue, you will avoid being responsible for legal fees. Another important term to try to establish is that the lender should notify you in the case of any late payments. This allows you to become aware if any problems should arise, and you will be able to take control of the situation before matters become more complicated.
Even though co-signing for a loan may sound risky, there are certain situations where the practice is wholly reasonable. Parents, for instance, routinely co-sign for their children in order to help them establish credit, and to aid them in making large important purchases.
But what about your friend - do you co-sign, or not? The decision is ultimately yours, though it would be wise to balance the risks carefully. If you decide to co-sign, be prepared to treat the loan as if it were your own.
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