What if you were asked to co-sign a loan for a family member or friend? Would you do it? Before you give your answer, make sure you understand what co-signing involves. Under a Federal Trade Commission rule, creditors are required to give you a notice to help explain your obligations. The co-signer’s notice says:
• You are being asked to guarantee a debt. 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 the responsibility.
• You may have to pay up to the full amount of the debt if the borrower does not pay.
• The creditor can col-
lect 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 or garnishing your wages. If the debt is ever in default, that may become a part of your credit record.
What are the chances that the borrower will default? Some studies of certain types of lenders show that as many as three out of four co-signers are asked to repay the loan.
The Better Business Bureau, along with the Federal Trade Commission recommends that 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 you may want or need and it could also hurt your credit score.
• 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 might have to get copies from the borrower.