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Read This BEFORE You Co-Sign For A Loan!

Written by: Mike Cotter



It happens every day of the year; a friend, who has had problems with his/her own credit, wants to buy a new car, or perhaps furniture for their apartment. The problem is that they don't have the cash do it, and because their credit is poor, they can't get the approved. They approach their friend and ask if they would be willing to co-sign the loan. "I only need your signature to get approved," they say. "You won't have to do anything else!"



WAIT! CAUTION!

Before you co-sign that loan, there are some things you should know. In reality, this isn't merely signing the loan application, but a very serious proposition. What's more, if things go wrong and the friend can't keep up with the payments, guess who would be responsible for the loan balance? That's right--you.

If you are thinking about co-signing a loan for a friend or family member, why not first read the following in order to understand what you're about to get into.

Risk

If someone is asking you to co-sign a loan that means that the professional lender is not willing to take a risk on them. In other words, their past credit behavior has been so bad that the lender doesn't believe they will pay back the loan. What makes you so sure they will? Why should you take the risk if the professionals in the industry refuse? Furthermore, the professional's get paid interest to take risk, what do you get?

Responsibility

By placing your signature in the co-signers spot, you are guaranteeing that if your friend doesn't make the payments, you will. Do you have the finances to cover the loan if it comes down to that? Do you really need another car payment?

Credit Report

You've obviously worked hard to keep your credit report spotless, which is why your friend wants it represented on his/her application, but did you know that if your friend misses a payment or becomes delinquent with his payments, that it will affect your credit report? The lender will most certainly report your delinquent co-signer payments along with your friend's delinquent payment. In fact, every payment or non-payment your friend makes will be reported on your credit report.

Collections

If the account does go into collections, it is possible that the lender could bypass your friend (who they never believed would repay the loan in the first place) and come after you first. This is true in most states, and it would be important to find out where your own state stands on this policy.

In addition, you should be aware that by co-signing on a loan, you may actually reduce the amount of credit you will be able to get yourself because that loan payment will count toward your "total payments owed."

If you do decide to co-sign for a loan, there are some steps that you should take in order to protect yourself.

First, you should ask to be notified in writing if your friend misses or is late with a payment. By knowing of any problems early on, it will help you keep the potential damage to your own credit report from getting out of control. However, the lender is under no obligation to notify you and most will not, until the loan is seriously delinquent. At that point, it's too late; your credit has been damaged.

Next, you should also get copies of all loan documents and repayment schedules. Ask for a copy of everything that your friend gets in case there is ever a dispute, you will know what legal rights you have.

Co-signing for a loan is serious business, and is something that you should think long and hard about. Even if it's your dearest friend who is asking, you have to ask yourself if they defaulted on the loan, what will that do to your friendship?

About the author:

Mike Cotter has been a professional lender for over 30 years. He began his career in the commercial banking industry in 1972 and steadily progressed to become Vice President of Retail Banking with a major Denver bank. In 1982 he opened his own commercial bank and served as President and CEO for 10 years. In 1992 he left commercial banking for the mortgage banking field. Rocky Mountain Mortgage Rates.com

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