Do Research Before Agreeing to Cosign A Loan
Agreeing to cosign a loan for a friend, sibling or child can be a great way to help them establish their own credit, but if that person doesn’t make payments on time, it can also very easily damage your own credit report.
Before agreeing to cosign for any loan, research the loan and find out what you will be responsible for if the borrower defaults on the payments. Have a frank discussion with the primary borrower about the importance of making payments on time and discuss what the consequences of not making payments will be.
If you do decide to cosign, be aware that if the primary borrower defaults on the payments, you will be responsible for the bulk of the loan. In some cases, you may also be required to pay collection costs, attorney’s fees and late fees on top of the primary loan amount. Make sure that you can afford to pay that loan, if need be, before you sign. If you must provide collateral, make sure that you can afford to relinquish any property you provide.
Get a copy of the loan in advance, and keep a copy of it in a safe place, along with any receipts or warranties relating to the loan. Write a letter to the lender and ask to be notified if there is a default on the loan. If the lender keeps you informed, you may be able to make payments to keep up with the loan instead of having to pay for the entire loan at once.
If you are cosigning a loan for a purchase such as a car, and neither you nor the primary borrower are making payments on the vehicle, the creditor may be able to repossess and sell it, and pursue you for the balance of the loan. If you cosign for a line of credit that both you and the primary debtor are unable to make payments on, try to negotiate with the credit card company to pay a smaller, up-front lump sum payment. Many creditors are willing to do so rather than wait to collect over a longer period of time.
Always make sure to keep the lines of communication open between yourself and the creditor and do everything you can to work out a payment plan. Remember, if the primary borrower and you, the cosigner, both default on the loan, the default will be reported and turn up on both of your credit reports.
Cosigning a loan can be a positive experience for both you and the primary borrower as long as you go into the situation fully informed. If you research the loan and are proactive about making sure payments are made, cosigning can be a good way to help someone else establish credit without damaging your own.