Cosigning a Loan
COSIGNING A LOAN
LEGAL AID OF WESTERN MCIHGAN
What would you do if a friend or relative asked you to cosign a loan? Before you give your answer, make sure you understand what cosigning involves. Under Federal Trade Commission rule, creditors are required to give you a notice to help explain your obligations. The cosigner's notice says:
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.
You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.
This notice is not the contract that makes you liable for the debt.
Under Michigan law, the creditor is not required to attempt to collect from the primary debtor before starting collection proceedings against the co-signor or reporting "adverse" information to a credit reporting service. However, before reporting the "bad debt" against the co-signer, the creditor is required to give notice of the default by the primary debtor to the co-signor. The creditor must give 30 days after the notice for the co-signor to either pay the debt or make arrangements to do so--and cannot report the "adverse" credit information if the co-signor has done this.
Cosigners Often Pay
Studies of certain types of lenders show that, for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. That statistic should not surprise you. When you are asked to cosign, you are being asked to take a risk that a professional lender will not take. The lender would not require a cosigner if the borrower met the lender's criteria for making a loan.
If you do cosign and your friend or relative misses a payment, the lender can collect from you immediately without pursuing the borrower first. If the lender decides to sue to collect, the amount you owe may be increased by late charges or by attorneys' fees. If the lender wins the case, he or she may be able to take your wages and property.
If you do co-sign and your friend or relative declares bankruptcy and his debt is discharged by the Bankruptcy Court, you will still be responsible unless you also file for bankruptcy.
If You Do Cosign
Despite the risks, there may be times when you decide to cosign. Perhaps your son or daughter needs a first loan, or a close friend needs help. Here are a few things to consider before you cosign.
Be sure you can afford to pay the loan. If you are asked to pay and cannot, you could be sued or your credit rating could be damaged.
Before you cosign a loan, consider that, even if you are not asked to repay the debt, your liability for this loan may keep you from getting other credit you may want.
Before you pledge property, such as your automobile or furniture, to secure the loan, make sure you understand the consequences. If the borrower defaults, you could lose these items.
You may want to ask the lender to calculate the specific amount of money you might owe. The lender does not have to do this, but some will if asked. You also may be able to negotiate the specific terms of your obligation. For example, you might want to have your liability limited to paying the principal balance on the loan, but not late charges, court costs, or attorney's fees. In this case, ask the lender to include a statement in the contract like this: "The cosigner will be responsible only for the principal balance on this loan at the time of default."
Ask the lender to agree, in writing, to notify you if the borrower misses a payment. In this way, you will have time to deal with the problem or make back payments without having to repay the whole amount immediately
Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and any warranties if you are cosigning for a purchase. You may need these if there is a dispute between the borrower and the seller. Because the lender is not required to give you these papers, you may have to get copies from the borrower.
The Federal Trade Commission enforces a number of federal laws involving consumer credit for which free publications are available. If you would like additional information, or would like to file a complaint, call them toll free at 1-877-FTC-HELP (1-877-382-4357) or use the complaint form at www.ftc.gov.
This brochure is intended only to provide general information. If you have more complicated questions or need more specific advice, please consult a lawyer.