Great Savings Tip #70 – Never Cosign A Loan

Cosigners face huge risks.
We all love our families and want to do everything we can to support them, so the issue of cosigning for a loan usually comes down to making a very tough decision.  If money is no object and you can afford to take a hit, then cosigning carries less risk.


Unfortunately, most of us don’t fall into the category of having too much money. That means your risk in cosigning a loan, lease, or contract is it can put your financial future in jeopardy. How? Cosigning means you assume liability if something goes wrong. Simply put, that could require you to pay off the entire balance if the person you sign for defaults. It also means you’ll be on the hook for any accumulated interest, late fees and collections costs.  Worse, if for some reason you can’t pay off the balance due, the lender may have a right to try and garnish your wages or in certain cases go after your property. Finally, in some states, when a borrower defaults on their loan a lender may even try to collect from the cosigner first!  That’s you!


Everyone Plans To Pay


It’s rare when anyone goes into a loan thinking they are going to default from the get-go. In fact, if the lender can prove that was the borrower’s intent when they signed, then they have grounds to file charges for fraud.


The Fremont troll.

Being asked to cosign is a little like moving next door to a monster. You’ll never know if or when it’s going to bite you.

You Can’t Predict


Unfortunately, good intentions for paying off a loan only go so far.  The bottom line is that no matter how well you think you know someone; you can’t predict the future, or their future behavior.  Even the best sons and daughters make bad decisions from time to time.  Sometimes people get sick or injured unexpectedly. Other times, they lose their job or have an emergency expense that will take precedence over paying the loan. Any of these possibilities could mean you will be the one saddled with the debt. That can affect your credit score as well. There are also cases of parents or grandparents who cosigned for a child’s private student loan and then their child died in an accident. Even under  such unimaginable circumstances, these cosigners are sometimes required to pay off their deceased child’s loan! Oh, and if you think it’s unusual for cosigner’s to pay off a loan, think again. According to the FTC’s website, on certain types of loans, 3 out of every 4 cosigners end up paying the bill.


It’s Tough Saying No


For some, telling their child or close friend “no” when they ask you to consign is going to be impossible.  If you find yourself in this position, you can: (1) Ask the lender to notify you if the borrower misses a payment.  This gives you more time to take corrective action. (2) Find out whether of not your pledging any assets as security for the loan.  If you are, you could lose them.  (3)  Have the terms of the loan adjusted so you’re only on the hook for a certain specific amount or for certain items (for example, you won’t pay for any attorney or collection fees).  (4) Get copies of all loan documents up front so there is no mystery about loan terms. (5) Check into state law to find out your rights as a cosigner.  State laws do vary.


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