Co-Signing a Loan

Once you have signed the papers you’re every bit as responsible as the primary loan signer to make payments. To quote from the FTC’s Facts for Consumers guide “Co-signing a Loan“: “When you’re asked to co-sign, you’re being asked to take a risk that a professional lender won’t take. If the borrower met the criteria, the lender wouldn’t require a co-signer.”

If a loan goes into default the lender, in some states, has to try to collect from the primary debtor first before trying to collect from you. In other states, the lender doesn’t have to take that first step. Regardless, you are responsible for the payments and the payment history will show up on your credit report. The contents of your credit report determine your credit score.

Often the best way out of this situation is to sell the collateral that was used to secure the loan. But you as a co-signer often do not have title and cannot liquidate the asset without the primary debtor. Then there are the times when the collateral used to get the loan (car, house equipment) are worth less the outstanding balance on the loan. So if sold someone has to have the cash to make up the difference. As a co-signer it is best to protect your credit by continuing to make the payments with the hope the primary debtor can resume responsibility again.

Co-signing a loan puts you at risk; it is really essential that you know who you are co-signing for and be comfortable both psychologically and financially with possible consequences of default.

Examples of things that can happen include something called a voluntary repossession ― where the primary loan signer turns the asset over to the lender. A benefit to this is that the debtor can save some of the costs associated with an involuntary repossession. That basically means you don’t have to pay for the repo man, but it will still hurt your credit history.

In addition, you’ll still be responsible for any deficiency when the bike is sold if the proceeds don’t cover the loan balance and the lender’s costs associated with the repossession and sale of the bike.

Think Twice.

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