How to Protect Yourself: Co-signing a Loan
Source: The Florida Attorney General's Office
Before you decide to co-sign a loan with someone, make certain that you understand exactly what cosigning a loan involves and what your obligations will be. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. Consider these suggestions:
Federal Trade Commission (FTC) Rule
Under the rule, 16 CFR s.444.3, creditors are required to give a cosigner a notice that explains what his or her obligations would be. The cosigner's notice states that the co-signer is being asked to guarantee this debt; and may have to pay up to the full amount of the debt if the borrower does not pay; may also have to pay late fees or collection costs.
It also states the creditor can collect this debt from the co-signer without first trying to collect it from the borrower and the creditor can use the same collection methods against the co-signer that can be used against the borrower, such as a lawsuit, garnished wages, etc. If the debt is ever in default, that fact may become a part of the co-signer’s credit record.
This notice is not the contract that makes you liable for the debt.
Cosigners Often Are Required to Pay
You, as a co-signer, are being asked to guarantee someone else’s debt. The lender would not require a co-signer if the borrower met the criteria for the loan. If the borrower misses a single payment, the lender can collect from you immediately. Also, the amount you pay may be increased by adding late fees, not to mention court costs and attorney's fees if the lender decides to sue to collect. If the lender wins the case, your wages and property may be garnished or taken.
If You Decide to Cosign
If you decide to cosign despite the many risks, remember to carefully consider all factors. Be sure you can afford to pay the loan - you should keep in mind that you are obligating yourself to the loan, which may prevent you from obtaining other credit you may want. Do not pledge property to secure the loan unless you fully understand the consequences. If the borrower defaults, you could lose your property. You may also want to ask the lender to limit your liability upon default. For example, the lender could include a statement in the contract that "the co-signer will be responsible only for the principal balance on the loan at the time of default." You could ask the lender to notify you, in writing, if the borrower misses a payment. Lastly, make sure you get copies of all documents related to the loan. The lender is not required to give them to you, and if the lender does not provide them, ask the borrower to make you a copy of the documents.
If you have questions or concerns regarding a bank, a finance company or a loan company, you should contact the Florida Office of Financial Regulation’s consumer hotline at 1-800-848-3792. You may also wish to write to the FTC, Public Reference, Washington, DC 20580, to obtain these free publications: Credit Practices Rule and Solving Credit Problems. You may also phone the FTC at 202-326-2222 or TDD, 202-326-2502.