To cosign or not to cosign
Contributed by
Take Charge America

Did you know that three out of four cosigners are ultimately asked to repay the loan?

That's according to the Federal Trade Commission, which also reports that in most states, if you cosign a loan for someone who misses a payment, the lender can immediately collect from you without first pursuing the borrower.

Mike Sullivan, director of education for Take Charge America, a national non-profit credit counseling agency, says problems often arise when the cosigner and borrower do not have a complete understanding of what cosigning entails.

"We find that families and friends often cosign for their loved ones without reading the fine print," he said. "Cosigning is more than helping someone qualify for a loan. A cosigner is ultimately telling the lender that he or she is responsible for the loan."

Sullivan describes four facts every cosigner needs to know:

Once you cosign, there's no going back. A cosigner cannot change his or her mind mid-way through the term of the loan. Unexpected events like job loss and divorce need to be taken into consideration before signing on the dotted line.

Cosigning a loan may prevent you from obtaining credit for yourself. If you cosign a loan, the loan amount is counted as one of your obligations. That liability could prevent you from qualifying for another loan or line of credit.

A cosigner could be forced to pay more than the loan amount. If the borrower skips a payment or can't pay the loan, late fees and collection costs can also be forwarded to the cosigner. If legal action is needed to obtain the money, cosigners may also have to pay for attorney fees.

A cosigner's wages and property can be garnished if the lender sues and wins. If you do cosign a loan, be sure that you have the financial backing to pay off the loan without going into debt. Failing to repay the loan or fees will negatively affect your credit score.

Sullivan says if you do decide to cosign a loan, there are steps you can take to protect yourself.

"Contracts and other legal documents are referenced when disputes arise, so it's important that both the borrower and cosigner have copies of everything," he said. "Cosigners can protect themselves further by asking the lender to notify them in writing if the borrower ever misses a payment. That could prevent a trail of extra fees."

About Take Charge America

Founded in 1987, Take Charge America, Inc. is a nonprofit organization headquartered in Phoenix, Arizona. TCA offers a variety of services including financial education, credit counseling, and debt management. To learn more about TCA or its programs please call 1-800-823-7396 or visit www.takechargeamerica.org.