A friend or relative asks you to cosign a loan, perhaps to buy a car or home. You're told your signature is needed because he or she has no established credit record, or maybe there have been credit problems in the past. The borrower assures you that he or she will make the payments and that co-signing the loan is risk-free.
Co-signing a loan means that you guarantee to pay the money back if the other person doesn't. The Federal Trade Commission reports that as many as three out of four co-signers are requested to make payments on a loan. If the borrower met the basic lending criteria, the lender would not require a cosigner. The borrower may also become unemployed or ill and no longer be able to repay the loan.
If you as a cosigner refuse to make the payments, you could get a bad mark on your credit record that could make it tougher to get a loan, a job, an insurance policy or something else you might apply for in the future. The lender can sue you and attempt to "garnish" wages (withhold a percentage of your paycheck until the loan is paid). You may be responsible for late fees or legal fees. If you offered collateral (such as your automobile or home) as security for the loan, the lender may seize the property and sell it to cover the debt.
Before you decide to cosign a loan, make sure the borrower understands that when he or she is late with payments or misses a payment that your credit record could be damaged. Have an understanding (perhaps even a written agreement) with the borrower that you will get early notice of any troubles, including late payments, so you can keep on top of the loan and work out any problems with the lender before your credit record is damaged. Since three out of four cosigners eventually make payments on loans, be sure you can afford to pay the loan in the event that you must.
Lenders are required by federal law to give cosigners a notice that explains your risks and responsibilities. Ask the lender to estimate the amount of money you might owe if the borrower defaults. While a lender is not obligated to do so, they may be willing to agree to limit what you would owe in the event of a default, perhaps waiving certain fees and additional fees or costs. Be sure to include any limitations on your liability in the loan contract.
After you cosign, keep copies of all loan documents. These records could protect you from excessive fees or penalties if the borrower defaults. If problems arise, try to resolve the matter with the lender directly. Whether or not cosigning a loan is a good idea is a personal decision. But before you do sign, make sure you understand that you could end up having to repay the loan.
Debbie Wilburn is County Agent/Family and Consumer Science Agent with the Hall (770)535-8290 and the Forsyth (770)887-2418 County Extension Service.
Monday
August 4th, 2025
8:12PM
