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Co-signing a Loan

HandelontheLaw.com Staff Writer

Friday, December 20, 2013



Co-signing a Loan
Co-signing a Loan

Aw, geez: somebody just asked you to cosign for a loan. Should you or shouldn’t you? If you do cosign, what should you do to protect yourself? At some point in your life, you may be asked to cosign a loan for someone else. “Cosigning” means “co-borrowing” and at least theoretically means that you are agreeing to be totally – that is 100 percent – liable for repaying the loan and all related costs, including the loan principle, interest, penalties, attorney’s fees and costs of suit, if the other signer does not comply with the terms of the loan. Furthermore, even if the other signer does pay the loan but pays late or skips payment, those lapses will appear on your own credit report. Given the burdens you would be voluntarily accepting by cosigning, there are steps you should take/consider before, during and after cosigning.

Before you cosign a loan, you should answer several questions. Since potential creditors will deem this loan one of your debts, will cosigning this loan somehow affect your own ability to borrow? Since you will be totally responsible for the loan if the borrower defaults, can you afford to repay the loan and all the costs associated with it? Since indebtedness sometimes affects tax exemptions and has other tax consequences, will cosigning this loan somehow affect your taxes? Since loans are sometimes secured by other property such as cars, homes, jewelry, etc., will you be asked to pledge any of your valuable property for the loan and are you willing to risk losing that property?

Suppose you answer all the above questions in favor of cosigning for this individual; then, you would move to the steps/considerations while actually cosigning. You should make any reasonable steps to protect yourself. Some states will allow you to impose certain conditions on cosigning. For example, some states will allow you to request that certain limitations be placed on your own responsibility for the loan. In those cases, you can limit your liability for the loan principle and related charges, so ask the lender to do so in writing. These limitations can be stated: "The co-signer will be responsible only for the principal balance on this loan and/or _____________ and/or __________ in case of default." You can also ask for the lender’s written agreement to give you a written notice of any misstep by the other signer, such as being late on a payment or missing it altogether, or any change in the loan. In this way, you can react to problems with the loan before they reach “critical mass” and you are pursued by a collections department/attorney for payment. Furthermore, a cosigner might take the further proactive step of ensuring that the loan designates the cosigner as the receiver of payment requests so he/she can stay on top of each and every payment. You can also request that the lender give you the exact dollar amount(s) of what you will owe and of each monthly payment if/when the other signer defaults. Since you are a borrower right along with the other signer, you are entitled to copies of documents such as the loan contract, a Truth-In-Lending Disclosure Statement, any warranties, certainly from the other borrower if not from the lender. Furthermore, in some states such as California, the lender is required to give you a written statement of your rights/obligations as a cosigner. You should collect and keep copies of all those documents, which may help you if anything goes awry with the loan.

After the loan is cosigned, have the other signer make the monthly payments to you, and then YOU make the loan payments to ensure that every payment is made in full and on time. In that case, keep records of payments made to you by the other signer and payments made by you to the lender. If you do not have the arrangement of being-paid-and-then-paying, you are leaving yourself open to the other signer’s possible default. In that case, periodically check on the loan repayment’s status so you can act to cure any problems when they arise. In any event, you should keep all documents received in connection with loan payments. If the other person defaults and you are unable to handle the problems as they arise, you will be subject to credit/collection problems just as though you were the original borrower. In that event, consult with a lawyer who specializes in credit/collections to safeguard your rights as the cosigner.


DO’S AND DON’TS

DON’T be intimidated by the process or the people.

DO ask yourself if cosigning this loan somehow affect your own ability to borrow.

DO as yourself if you can afford to repay the loan and all the costs associated with it.

DO ask your tax professional/attorney whether cosigning the loan will somehow affect your taxes.

DO ask yourself whether you will be required to pledge items of your property for the loan and whether you are willing to risk losing that property.

DO ask the lender to limit your liability for the loan principle and related charges in writing.

DO ask for the lender’s written agreement to give you a written notice of any misstep by the other signer, such as being late on a payment or missing it altogether, or any change in the loan.

DO take the further proactive step of ensuring that the loan designates the cosigner as the receiver of payment requests so you can stay on top of each and every payment.

DO request the lender’s written calculation of the exact dollar amount(s) of what you will owe and of each monthly payment if/when the other signer defaults.

DO obtain and keep copies of documents such as the loan contract, a Truth-In-Lending Disclosure Statement, any warranties, certainly from the other borrower if not from the lender.

DO demand a written statement of your rights/obligations as a cosigner.

DO have the other signer make the monthly payments to you, and then YOU make the loan payments to ensure that every payment is made in full and on time.

DO keep records of payments made to you by the other signer and payments made by you to the lender.

DO periodically check on the loan repayment’s status so you can act to cure any problems when they arise.

DO keep all documents received in connection with loan payments.

DO consult with a lawyer who specializes in credit/collections to safeguard your rights as the cosigner.


By Kathy Catanzarite

[Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information cannot be guaranteed. Readers act on this information solely at their own risk. Neither HandelontheLaw.com, or any of its affiliates, shall have any liability stemming from this article.]


Source: Kathy Catanzarite - Handelonthelaw.com Staff Writer

Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information can not be guaranteed. Readers act on this information solely at their own risk. Neither the author, handelonthelaw.com, or any of its affiliates shall have any liability stemming from this article.





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