009 – What are the problems with Co-signing for a Loan
Usually, the request comes from a friend or family member. They just need someone to sign off with them for that new car or other loan. What’s the harm, right? They are going to make the payment on time every month, right? So it will probably help your credit out, too. What responsibility will you bear for this loan? Generally, a co-signor for a loan bears liability for the entire loan plus the interest. And typically the problem for the co-signor is that the loan very delinquent by the time the co-signor finds out about it.
Co-Signer Liability Under a Loan Agreement
Oftentimes, people believe that because they are signing for someone else, they are at worst, only responsible for their portion of the debt. For example, if there is one primary borrower and you are the only co-signor there would be two of you so you would be responsible for one-half of the debt. This is just wrong. Your liability is known as “Joint and Several” meaning the creditor can go after one of all of the signors of the loan to seek the full payment. Most of the time the creditor is going to spend the most time going after the person whom they deem they will have the easiest time collecting from. If your friend needed a co-signor to get the loan, most likely they are not going to be the target.
What happens if the loan you co-signed defaults?
The contract will define what a default is, but typically means that the loan has not been paid in accordance with the agreement. So what issues face the co-signor. The first thing the co-signor will notice is the damage to the credit report. This damage usually occurs before the co-signor even becomes aware of the problem because they have not received notice of any delinquent payments. Once the co-signor finds out about the delinquency, he has the option to pay the debt in full or work with the primary signor to refinance the loan out of his name. the likelihood of being able to do that is slim to none since a co-signor was needed in the first place and now there is a default on record and both parties’ credit scores have been damaged. If neither of you pay, then you may be the target of a breach of contract lawsuit seeking the principal, interest, and other damages incurred by the lender due to the default.
What can you do if you still want to co-sign for someone?
First, rethink this. You probably don’t want to get into this type of relationship with a family member or friend. But, if you do, you can request some important terms to be added to the contract that will afford you some protection: (1) request to be notified of any late payments. (2) Limit your liability to the principal balance alone. Once again, I will caution you on entering into a co-signor relationship because of the potential impact it may have on your personal finances even if you are able to negotiate the helpful terms into your agreement.