Jim Winsett of the BBB. Q. I have been asked to co-sign a loan for a close friend? Will BBB help me understand what co-signing involves and its commitment?
A. Under Federal Trade Commission rules, creditors are required to give you a notice to help explain your obligations. The co-signer’s notice states:
– You are being asked to guarantee a debt. If the borrower does not pay the debt, you are obligated to pay. Be sure you can afford to pay if required, and that you are willing to accept the 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.
– The creditor can collect the 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 wages, etc. If the debt is in default, that debt may become a part of your credit record.
Note: what are the chances that the borrower will default? Studies of certain types of lenders show that as many as three out of four co-signers are asked to repay the loan.
Despite the risks, there may be times when you decide to co-sign. A family or business emergency may be an example. The BBB along with the Federal Trade Commission recommends you consider the following before you co-sign:
Be sure you can afford to pay the loan. If you are asked to pay and you cannot, you could be sued or your credit rating could be damaged.
Before you co-sign a loan, consider that even if you are not asked to repay the debt, your liability for this loan may keep you from getting other credit loans you may want or need, and it could also hurt your credit score.
Before you pledge properties, such as your car or home, in order to secure the loan make absolutely sure you understand the consequences.
Ask the lender to agree, in writing, to notify you if the borrower misses a payment. This will give you time to deal with the problem or make back payments.
Obtain copies of important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement and any warranties if you are co-signing for a purchase. The lender is not required to give you these papers – you may have to get copies from the borrower.
Once you become a co-signer on a loan, the likelihood you could be removed from the loan at a later date is very remote and usually requires a new loan application. If you are told you can ask to remove your name that is a red flag.
Just remember, when you co-sign for a loan, you are taking a risk that the lender is not willing to take; so be sure you are comfortable with all of the terms and conditions. Also, make sure you can afford to make the payments should the borrower fail to keep his or her obligation.
Jim Winsett is president of the Better Business Bureau in Chattanooga