CCH Financial Planning Toolkit

Tuesday, October 14, 2008

Financial Planning Process

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Cosigning a Loan

What would you do if a friend or relative asked you to cosign a loan? Before you give your answer, make sure you understand what cosigning involves.

Warning

Under a Federal Trade Commission rule, creditors are required to give you a notice to help explain your obligations as a cosigner. The cosigner's notice says:

"You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't 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."

If you do cosign:

Make sure you can afford to pay the loan. If you are asked to pay and cannot, you could be sued or your credit rating could be damaged.
Before you cosign a loan, consider that even if you are not asked to repay the debt, your liability for this loan will appear on your credit record and may keep you from getting other credit that you may want.
Before you pledge property, make sure you understand the consequences. If the borrower defaults, you could lose these possessions.

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