When it comes to debt, you should always make an informed decision. If one of your family members or a friend asks you to cosign a loan, you need to understand what cosigning a loan means and what it entails. Under federal law, creditors are required to give you a notice that explains your obligations. Understanding what cosigning a loan means can help you avoid too much debt in your personal finances.
Cosigning a Loan – What Should You Know?
What cosigning a loan really means is that you act as a guarantor for the debt. If someone doesn’t qualify for a worthwhile loan on their own, they have the option to have a more financially stable individual sign along with them as a backup. Therefore, if the borrower fails to pay off debts, the person who cosigned is responsible. Be sure you can afford to pay the loan if you have to and that you want to accept the responsibility as the cosigner. These payments can include anything from the full debt, late fees and collection costs.
The risk of cosigning a loan is that the creditor can use the same collection methods against you that can be used against the borrower. These include suing you or garnishing your wages. If this debt is ever in default, it may become a part of your credit record. Ultimately, if the primary borrower fails in their duties to repay their loan, you become responsible.
By Cosigning a Loan You Will Probably Have to Pay
In most states, if you cosign and your friend or relative misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, you may owe an increased amount. This can be due to the late charges or attorneys’ fees. If the lender decides to sue to collect and wins the case, they can take your wages and property. Before cosigning a loan, make sure that you and the other borrower fully understand the agreement and potential risks.