Question: I'm considering cosigning a loan for my brother. What is my responsibility if he does not pay it?
Answer: Cosigning a loan for someone can be a big help for someone trying to improve their credit rating. Providing them the opportunity to build a positive credit history will help improve their credit score.
As a cosigner on a loan, it is your responsibility to make the payments if your brother defaults. Choosing to cosign a loan for a friend or relative is a serious decision. Before doing so, you should consider the following:
When cosigning a loan, in most cases, it's the same as taking out the loan yourself. If the borrower does not pay the debt back, the creditor expects you to make the payment in their place. If you do not make the payment, you are subject to the same collection activities as the borrower is. For example, you could be sued or wages could be garnished in order to cover the debt.
Before deciding to cosign a loan, ask the lender how much you would be responsible for to pay back. In some cases it may just be the principal on the loan and not the added interest, late fees or attorney fees if the loan goes into default.
You also want to consider whether you could make the loan payments if the borrower defaults. As the cosigner, you must be prepared to take over the payments at any point in time.
In addition, cosigning a loan may prevent you from getting other credit. The loan will be considered as one of your obligations when evaluating your credit. If the borrower defaults and you can't make the payment, the loan will be reported as such on your credit report.
If you decide to cosign the loan, it's also a good idea to ask the lender to inform you if the borrower misses a payment or if the loan terms change. That way you won't be surprised if you have to take over the payment. You should also consider keeping track of the payments made by the borrower. Once you cosign, it's almost impossible to renege on the agreement.
Make sure the friend or relative you are cosigning for is trustworthy and serious about repaying the debt. Avoid cosigning for someone you don't know well or for someone you're in a relationship with that you're not sure will last. Consider the person's character before making your decision and consider what happens to your relationship if the borrower defaults on the loan.
Remember, you are taking a risk on the borrower that the lender was not willing to take, so be sure that your relative or friend has the ability to pay back the debt in full.
Heather Murray, manager of Education and Resource Development for Advantage Credit Counseling Service (dba Consumer Credit Counseling Service), can be reached at email@example.com. For more information about the agency's services, please visit www.advantageccs.org; or to access the free online budgeting tool, go to www.onlinebudgetadvisor.com.