Know What’s Involved Before Cosigning A Loan

April 11, 2013

What if you were asked to cosign a loan for a family member or friend? Would you do it? Before you give your answer, make sure you understand what cosigning involves. Under a 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 a debt. 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 the 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.
  • The creditor can collect the 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 the debt is ever in default, that fact may become a part of your credit record.

What are the chances that the borrower will default? Some studies of certain types of lenders show that as many as three out of four cosigners are asked to repay the loan.

Despite the risks, there may be times when you decide to cosign. Perhaps your son or daughter needs a first time loan. The Better Business Bureau, along with the Federal Trade Commission recommends that you consider the following before you cosign.

· Be 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.

· 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 or need and it could also hurt your credit score.

· Before you pledge property, such as your car or home, to secure the loan, make sure you understand the consequences.

· Ask the lender to agree, in writing, to notify you if the borrower misses a payment. This will give you time to deal with the problem or make back payments.

· Obtain copies of important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and any warranties if you are cosigning for a purchase. The lender is not required to give you these papers; you may have to get copies from the borrower.

Just remember, when you cosign for a loan, you are taking a risk that the lender is not willing to take so be sure you are comfortable with all of the terms and conditions.

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Kelvin Collins is president/CEO of the Better Business Bureau of Central Georgia & the CSRA, Inc. serving 41 counties in Central Georgia and the Central Savannah River Area (CSRA). This tips column is provided through the local BBB and the Council of Better Business Bureaus. Questions or complaints about a specific company or charity should be referred directly to the BBB at Phone: 1-800-763-4222, Web site: or E-mail: or