Can Cosigning Condemn your Credit?
Under the law, people are legally able to enter into biding contracts on their 18th birthday. But sometimes the coming of this new privilege doesn’t come with an understanding of what singing your name means.
A very common line that young people will sign on early into their credit history is the co-signer section of a loan or credit agreement. There are many reasons why people co-sign loans. Many times it is a parent who is helping their kid start credit. Other times it can be friends or significant others who are co-signing for an apartment, cell phone plan, car, or credit card.
By definition and by law, a co-signer is guaranteeing the loan. While they won’t get the bill each month, they are promising the lender that they are guaranteeing that the loan will be repaid. The bank is much less interested in who is writing the check, and more interested that the check is being written on time, and often enough. By being a co-signer on a loan or credit agreement you are taking a risk that the lender isn’t willing to take, and it is important to consider that risk.
Young people can often qualify as a cosigner because they don’t have any bad marks on their credit… yet. When you agree to be a consigner consider this :
1) Other credit companies will consider that just as if you were obligated for the full amount of the loan. If you cosign on a 25,000 car for a friend, credit companies will consider you to have a $25,000 obligation and might not want
2) You are every bit as legally liable for the amount of the loan as the borrower and can be sued if the loan isn’t paid.
3) In most states, even if the borrower misses one payment, the lender can begin collection efforts against the cosigner.
Additionally, new laws in several states allow student loans to be denied to students who are deemed “high risk”. This classification can come from having a large loan obligation (including a cosigner role) on your credit.
And no matter how sure the borrower may be able their ability to fulfill their payment obligations, the Federal Trade Commission reports that 75% of the time in cases where the borrower defaults on a loan, the cosigner is ultimately the person who ends up shelling out the cash to cover it.
Cosigning on a loan can be a very generous and an important step for people on both sides of the lending and credit process. For the borrower, it allows them to enjoy credit that they otherwise would not qualify for. For the co-signer, it allows him or her to build credit while not actually paying any money (in a successful loan agreement). And for the lender, it is a chance to do business with the security of limiting potential losses.
There are certainly ways that potential cosigners can protect themselves from getting in the hot seat. Not every lender offers these options, but a cosigner should only sign an obligatory agreement if they feel completely comfortable that their interests are protected.
1) Ask the lender to limit your liability to the principle amount of the loan. If they do end up having to pursue legal remedies, you will only be responsible for the original amount of the loan; not late fees, legal expenses, and other costs.
2) Require that the lender notify you immediately of a late payment. This offers you the chance to perform your own “collection” efforts by appealing to the borrower to pay the obligation. If you don’t know the loan isn’t being paid, the problem can become out of control very quickly.
3) Get a copy of all documents related to the loan. Know what you are singing.
A final thing to consider is that if a cosigner wants out of the obligation, there are sometimes ways that it can happen. For example; a person cosigns on a car for their boyfriend or girlfriend and they end up breaking up a year later. There is a good chance the loan is being paid in good faith and that the borrower has earned enough credit that the lender will release you from your obligations. In some states the borrower must also agree to release you.
Don’t forget your co-signer obligations even if your relationship changes
Financial decisions, while made easily with a pen stroke, have lasting implications on a young person’s credit. Being a co-signer is a serious commitment and should not be done without careful consideration. There is a lot to know and the best way to protect yourself is to know and understand your risk. Ask questions, and require some of your own terms.
Cosigners are like copilots. They fly and crash along with the pilot. Know what flight you’re getting on, and whose flying the plane.
If you wish to cosign loans or credit cards be sure and check out our favorite lending partners.
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