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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