COSIGNING A LOAN

TIPS FOR CONSUMERS

Federal Trade Commission (FTC) Rule

Under the rule, 16 CFR s.444.3, creditors are required to give a cosigner a notice that explains what your obligations would be. The cosigner's notice states:

 

• "You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this 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, which increase this amount.
• The creditor can collect this debt from you without first trying to collect it 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 this debt is ever in default, that fact may become a part of your credit record.
• This notice is not the contract that makes you liable for the debt."

 

Cosigners Often Are Required to Pay

Remember, you are taking the risk that the lender would not. You are being asked to guarantee someone else's debt. The lender would not require a cosigner if the borrower met the criteria for the loan. If the borrower misses a single payment, the lender can collect from you immediately. Also, the amount you pay may be increased by adding late fees, not to mention court costs and attorney's fees if the lender decides to sue to collect. If the lender wins the case, your wages and property may be taken.

If You Decide to Cosign

Despite the many risks, if you decide to cosign, remember to carefully consider all factors. Be sure you can afford to pay the loan - you may have to keep in mind that you are obligating yourself to the loan, which may prevent you from obtaining other credit you may want. Do not pledge property to secure the loan unless you fully understand the consequences. If the borrower defaults, you could lose your property. You may want to ask the lender to limit your liability upon default. For example, the lender could include a statement in the contract that "the cosigner will be responsible only for the principal balance on the loan at the time of default." You could ask the lender to notify you, in writing, if the borrower misses a payment. Then, you may be able to straighten out the problem, or at a minimum, make back payments only without having to repay the entire amount due. Lastly, make sure you get copies of all documents related to the loan. The lender is not required to give them to you, and if the lender does not provide them, then ask the borrower to make you a copy of the documents.

Additional Information

If you have questions or concerns regarding a bank, finance company or a loan company, you should contact the Texas Department of Banking at (512) 475-1300. You may also wish to write to the FTC, Public Reference, Washington, DC 20580, to obtain these free publications: Credit Practices Rule and Solving Credit Problems. You may also phone the FTC at (202) 326-2222 or TDD, (202) 326-2502.