Cosigning A Loan

Sherrie Bennett

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So your son or little sister has asked you to cosign for a car loan, because they have no credit history or a bad credit history. A little thought beforehand can save legal hassles down the road.

The cosigner of a loan agrees to be responsible for a loan's repayment if the borrower defaults on the payments. With most cosigned loans, the lender can request payment from the cosigner at any time, whether or not the debtor is actually in default on the loan. This is in contrast to a guaranteed loan, where a lender can go after the guarantor only after the debtor has actually defaulted.

A cosigner will in most cases also be responsible for any late charges, penalties and legal fees associated with a default. The lender can:

• Sue you and get a judgment against you
• Make you disclose your assets, and
• In extreme cases force the sale of property you own to pay the debt

In addition, if the debtor defaults, you may end up with a black mark on your credit history. And your future creditors will probably take the amount of the debt into consideration when determining how much money they're willing to loan you.

For all these reasons, it's important that you not cosign a loan unless you have the financial means to pay the entirety of the loan should the primary debtor default. If you can't afford to repay the loan with your own money, you shouldn't volunteer as a cosigner.

Negotiating Terms

Under the Federal Trade Commission ("FTC") Cosigner Rule, creditors are required to give a notice that explains what your obligation will be. This cosigner notice states:

"You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount. The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.This notice is not the contract that makes you liable for the debt."

Your state Attorney General may have additional information on cosigner rights in your state.

If you decide to take the risk of cosigning a loan for a family member or friend, try to negotiate the terms with the lender. Don't pledge property to secure the loan unless you can afford to lose it. If possible, add language to the loan agreement:

• Limiting your liability to the unpaid principal at the time of default, excluding late charges, penalties and legal fees
• Requiring the lender to notify you if a payment is late (so you can hopefully nip the problem in the bud)

It's important to get copies of all the loan documents, the Truth-In-Lending Disclosure Statement, and copies of sales receipts and warranties related to any consumer items being purchased.

Damage Control On Default

If neither you nor the primary debtor makes payments on a consumer such as a car, the lender will repossess it, sell it at auction, and come after you for any balance left owing on the loan.

If the primary debtor can't afford to get the payments back up to date, it may make sense to cut your losses right away by selling the item and making up whatever difference there might be on the loan. In most cases, this will be a cheaper way to maintain your good credit rating than making long-term payments on the item.

If the debt is owed to a credit card company, you can try negotiating to pay off a portion of what is owed. Most credit card companies would rather accept a lower repayment amount over than wait a long period of time for an uncertain result. If you end up negotiating a smaller repayment lump sum, make sure you get a clean credit record as part of the deal.

It's also important to set things straight with the primary borrower who defaulted on the loan, even if it's a close family member or friend. Make sure they sign a promissory note for the amount you've paid on the loan, and set up a definite schedule for repayment.