Think Long and Hard Before Cosigning for a Personal Loan

[Apr 14, 2009.]

 

Banks have become much stricter about who they’ll approve for a personal loan. So anyone applying for a loan should make sure they have what it takes to be seriously considered by lenders. Using a cosigner can help a borrower get approved for a loan, but there are pros and cons to agreeing to cosign.

Having a cosigner can help a borrower who has average or bad credit. Lenders are more likely to OK a personal loan if they feel that a person with a stable financial history is willing to take responsibility for the loan. But anyone who agrees to cosign for a loan is putting their neck on the line in case the primary borrower doesn’t pay it back. Here are some things to keep in mind before deciding to cosign for a loan:

—Creditors are required under federal law to give cosigners a notice that explains their obligations.

—In some states a creditor can attempt to collect the debt from a cosigner before collecting from the primary borrower.

—No one should ever cosign for a personal loan if they don’t have the funds to pay it back.

—Cosigners can be sued over unpaid loans.

—Being a cosigner on a loan can keep a person from obtaining other types of credit.

—If any property is put up as collateral, a cosigner could lose it if the primary borrower defaults on the loan.

—If a loan goes unpaid, the cosigner may be liable for fees and penalties, in addition to principal and interest.

—Cosigners should make sure they have copies of all loan documents, including the Truth-in-Lending Disclosure Statement.

People who consider consigning should also think carefully about the person asking them for help. Parents often cosign for loans for their children to help them out. If family members have a good relationship with a lot of trust, cosigning can work out well.

But there may be more risk involved if a person cosigns for a friend or someone whom they don’t know as well. Also, if someone with a really bad credit history is asking for help from a cosigner, that generally means they can’t get a loan on their own. Anyone who is asked to cosign for a loan should ask about the primary borrower’s credit history and whether there are any unpaid debts so they can make an informed decision.

 

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.