Tuesday, March 10, 2009

What You Need to Know Before Co-Signing on a Loan

Are you considering helping a friend or family member with obtaining a loan? If someone has asked you to co-sign on a loan, there are several things that you need to be sure to consider. Namely, you need to be certain to fully understand the possible short and long-term effects that co-signing on someone's loan may have.

Potential Problems with Co-signing

Many people do not fully understand what they are agreeing to when they co-sign for a loan, as many mistakenly believe they are simply helping someone get a loan and nothing more. The reality is that you are just as responsible for repaying the loan as the person you are helping out. In fact, depending upon the state where the loan is taken out, the lending company may have the right to come after you for repayment on the loan before coming after the person you co-signed for.

Regardless of the state where you live, the lending company does have the right to use the same collection methods on you as it would on the person you are co-signing for. This means the company has the right to send your name to a collections agency, to garnish your wages and to send the information to the credit reporting bureaus.

Getting Stuck with Someone Else's Debt

Unfortunately, statistics show that many co-signers end up getting stuck paying on the loans they helped someone else get. According to some studies, as many as 75% of co-signers are ultimately asked to repay the money that someone else borrowed. If you think about it, this shouldn't actually come to much of a surprise. After all, a lender only asks for a co-signer when the person borrowing the money is a risky investment. If the lender is not confident in the person's ability to repay the loan, why should you be? To make matters worse, if the person you co-signed for fails to repay the debt, you are also going to be held responsible for any late fees or other costs associated with the loan. Therefore, you could potentially get stuck with a debt that is greater than what you had originally bargained for.

Keeping Yourself Protected

If you still want to help someone out by co-signing on a loan, there are a few things you should keep in mind in order to keep yourself protected. If possible, see if the lender will agree to:

Put in writing that you will only be responsible for repaying the principal on the loan if the borrower defaults, which means you won't be responsible for paying court costs, late fees, attorney fees or other expenses that could be added to the cost of repaying the loan
Notify you if any of the payments toward the loan are missed so you can keep up with payments before it the loan gets too far in default
Provide you with copies of all papers associated with the loan, such as the actual contract, any warranties and the Truth-in-Lending Disclosure Statement

Of course, you also need to be certain you are financially prepared to repay the debt if the person you are co-signing for is unable to pay. This way, if the person defaults, you can be certain your credit remains in good standing.

About the Author: Shannon Kietzman is a well known author and trusted resource. Shannon regularly writes for http://www.reliacredit.com/ . For more info and to order your credit report with FREE credit score please visit http://www.reliacredit.com/

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