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Better Business Bureau ®
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Western Michigan
Co-Signing a Loan
July 29, 2014

Many times one of our friends or children many need more money than he or she can earn signing a documentor borrow from others. In such cases, you may be asked to co-sign for them on a car or personal loan. It seems like a harmless act of friendship or family love…right?

But before you do, understand that co-signing is a very risky action that can sometimes spell financial disaster. Michigan consumers need to understand exactly what co-signing is, and what risks are involved.

When a bank, credit union or finance company requires a co-signer, they are really saying that the person has several warning signs that he or she many not be a good credit risk. Theses institutions have had extensive experience lending money, and know the general profile of customers who tend to default on their payments.

By agreeing to co-sign, you are telling that lender that, if the other person walks away from the obligation, YOU will be responsible and you will make all the payments!

We often hear of a parent, girlfriend or roommate who co-signs for another, then calls the BBB in shock when he or she learns that the child or “friend” has disappeared and he or she is stuck with years of monthly payments for merchandise that they haven’t budgeted for and doesn’t even possess.

The amazing truth is that up to 75% of all co-signers end up making the payments for their friends, roommates or children. The bank lender is under no obligation to pursue your friend into another state or file suit, even if you tell them when your friend is. In fact, they need do nothing else but ask for the money you promised to pay when you co-signed. Your only resource is to sue your friend yourself.

If this happens to you, call and/or meet with the lender (if possible) immediately. Explain what has happened and ask if they can set up a way to help you through this situation, such as accept smaller monthly payments for a time. Any voluntary agreement you can reach will be much better than having them take legal action against you to recover the money.

Co-signing is a very serious step. Don’t do it unless you are fully able to actually make the payments.

Remember you can check thousands of company reports, even for lenders at bbb.org.