Facts for Consumers from the Federal Trade Commission

Cosigning a Loan -- November 1992

What would you do if a friend or relative asked you to cosign a 
loan? 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 this debt. Think carefully 
before you do. 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 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 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.

* Depending on your state, this may not apply. If state law 
forbids a creditor from collecting from a cosigner without first 
trying to collect from the primary debtor, this sentence may be 
crossed out or omitted on your cosigner notice.

Cosigners Often Pay

Some studies of certain types of lenders show that for cosigned 
loans that go into default, as many as three out of four 
cosigners are asked to repay the loan. That statistic should not 
surprise you. When you are asked to cosign, you are being asked 
to take a risk that a professional lender will not take. The 
lender would not require a cosigner if the borrower met the 
lender's criteria for making a loan.

In most states, if you do cosign and your friend or relative 
misses a payment, the lender can collect from you immediately 
without pursuing the borrower first. And the amount you owe may 
be increased _ by late charges or by attorneys' fees _ if the 
lender decides to sue to collect. If the lender wins the case, he 
or she may be able to take your wages and property.

If You Do Cosign

Despite the risks, there may be times when you decide to cosign. 
Perhaps your son or daughter needs a first loan, or a close 
friend needs help. Here are a few things to consider before you 
cosign.

l	Be sure you can afford to pay the loan. If you are asked to 
pay and cannot, you could be sued or your credit rating could be 
damaged.

l	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.

l	Before you pledge property, such as your automobile or 
furniture, to secure the loan, make sure you understand the 
consequences.  If the borrower defaults, you could lose these 
possessions.

l	You may want to ask the lender to calculate the specific 
amount of money you might owe. The lender does not have to do 
this, but some will if asked. You also may be able to negotiate 
the specific terms of your obligation. For example, you might 
want to have your liability limited to paying the principal 
balance on the loan, but not late charges, court costs, or 
attorneys' fees.  In this case, ask the lender to include a 
statement in the contract like this: "The cosigner will be 
responsible only for the principal balance on this loan at the 
time of default."

l	You may want to ask the lender to agree, in writing, to 
notify you if the borrower misses a payment. In this way, you 
will have time to deal with the problem or make back payments 
without having to repay the whole amount immediately.

l	Make sure you get copies of all important papers, such as 
the loan contract, the Truth-in-Lending Disclosure Statement, and 
any warranties if you are cosigning for a purchase. You may need 
these if there is a dispute between the borrower and the seller. 
Because the lender is not required to give you these papers, you 
may have to get copies from the borrower.

l	Check your state law. Some states have laws giving you 
additional rights as a cosigner.

The Federal Trade Commission enforces a number of federal laws 
involving consumer credit for which free publications are 
available. If you would like additional information concerning 
debt, ask for the following FTC publications: Credit Practices 
Rule and Solving Credit Problems. Write to: Public Reference, 
Federal Trade Commission, Washington, D.C. 20580.

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