Cosigning for a loan: What's your obligation?

Key points to keep in mind before signing on the dotted line.


Published: Monday, August 1, 2005 at 6:01 a.m.
Last Modified: Sunday, July 31, 2005 at 10:01 p.m.

Many new high school or college grads often look to make their first big ticket purchase a new car. But buying a new set of wheels is not always easy, especially when it comes to securing a loan. The next best option becomes asking a family member to cosign on a loan.

Cosigning for a loan involves several rules, and does not come without a degree of risk.

According to a Federal Trade Commission, a cosigner notice must explain that you are being asked to guarantee a debt. If the borrower doesn't pay the debt or defaults, the cosigner will have to cover it, including late fees or collection costs. A creditor can also collect an outstanding debt from the cosigner without first trying to collect from the borrower.

So, before signing on the dotted line, the Better Business Bureaus suggests a potential cosigning party keep these key points in mind:

- Make sure you can afford to pay the loan. If you are asked to pay and you cannot, you could be sued or your credit rating could be damaged.

- Even if you are not asked to repay the debt on a cosigned loan, your liability involvement with the loan may prevent you from getting other forms of credit that you may need.

- Understand the consequences before you pledge collateral, such as your car or home, to secure and back up the loan.

- Have the lender provide - in writing - an agreement to notify you if the borrower misses a payment. This will allow time to address the problem or cover back payments.

- Secure copies of the loan contract, the Truth-in-Lending Disclosure Statement and any warranties if you are cosigning for a loan or purchase. A lender is not required to give you these papers. Therefore, you'd have to get them from the borrower.

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