| Lila is 18 years old. She is interested in purchasing her first car. Lila does not have the full amount to pay the purchase price of the car in cash. Therefore, Lila applied for a loan so that she could finance the purchase and pay the purchase price in installment payments over the course of five years. The lender refused to give Lila a loan. As its basis, the lender indicated that Lila had no credit history upon which the lender could determine her creditworthiness. The lender advised Lila that if she could find a responsible person to cosign for the loan, the lender would give her the loan. Lila asked her beloved Aunt Doris to cosign.
What Does It Mean To Cosign A Loan?
In essence, a cosigner is an individual who makes an agreement to guarantee another person's repayment of a debt. If the borrower fails to make the payments on the loan, as required by the loan contract, the cosigner must repay the debt.
What Happens If The Borrower Doesn't Re-Pay The Loan?
If the borrower fails to repay the debt, the cosigner is liable. In fact, it is usually not necessary for a lender to undertake collection efforts against the borrower before seeking payment from the cosigner. Whether the lender can collect directly from the cosigner, without first attempting to collect from the borrower, depends upon the applicable state law. Notably, the cosigner may be liable for more than the amount of the debt. The cosigner may have to pay late charges, accrued interest, and collection costs, in addition to the original debt, if the borrower fails to make the required payments on the loan.
General Considerations
Certainly, there may be instances where a person wants to cosign a loan for another and feels comfortable doing so. Before cosigning a loan, the cosigner should consider the following questions:
- Can I afford to repay the loan if the borrower fails to make the required payments? If necessary, can I pay late charges, accrued interest, and collection costs, as well?
- Why is it that the borrower cannot obtain credit without a cosigner? Is the borrower a first time borrower or does the borrower have poor credit due to a history of failing to repay debts when due?
- How does my cosigning a loan for the borrower impact my creditworthiness? If the borrower's debt is included as an outstanding loan on my credit report, will I still be able to obtain additional money or credit in the event I need to do so?
- Is it possible for me to negotiate with the lender to limit the amount of my liability as a cosigner?
- Will the lender notify me, as the cosigner, if the borrower misses a payment?
- May I have a copy of all documents that relate to the loan?
For more information on your rights and responsibilities as a cosigner, you can contact the Federal Trade Commission (FTC). The contact information for the FTC is as follows:
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
1-877-FTC-HELP (1-877-382-4357)
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