Cosigning a Loan

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Not everyone can access credit when they need it.  In particular, younger people—who may have limited employment or credit report history—sometimes find it difficult to obtain a loan from a financial institution.  Since credit can be important to people who are trying to purchase a home or car, or finance a college education, parents, grandparents, other relatives, and even friends may be asked to cosign a loan that the lender won’t make to the main borrower alone. 

Although you may want to help a loved one get a start in life, there are significant legal effects for cosigners that you should be aware of.

What Happens When You Cosign?

When you cosign a loan, you become legally obligated to repay the loan if the borrower doesn’t pay it. Most cosigners believe when they sign the papers that the borrower will be able to repay the loan on his or her own.  But even  if the borrower has the best intentions to meet his or her obligations under the loan, unpredictable  things can happen to derail these plans, such as a loss of employment, inability to find a job, divorce, or unexpected illness.

The Attorney General’s Office has heard from grandparents living on fixed incomes who are hounded by debt collectors because a grandchild cannot find a job after graduation to pay back a student loan, from parents who cosigned a loan to help a child’s boyfriend or girlfriend only to be on the hook to repay the loan years after the couple has split up, and co-workers who cosigned loans for people they no longer work with.

The bottom line is this: cosigning a loan is a generous act with potentially serious financial consequences. You generally should only cosign a loan if you have the ability and willingness to pay off the loan in the event the borrower defaults.

Risks of Cosigning a Loan—What You Need to Know:

Before You Cosign, Become Informed:

Stay On Top of the Loan:

If you do cosign a loan, stay on top of it:

If the Loan Goes into Default

If the main borrower is unable to make payments on the loan, the responsibility of repayment falls to the cosigner. You may also be responsible for late charges, penalties, and collection costs. The lender may take legal action against you, pursue you through debt collection agencies, or sell the debt to a “debt buyer” to try to collect the money that is owed on the loan if the borrower does not pay or defaults on his or her repayment obligations.

The Attorney General’s Office has published flyers on debt collection and debt buyers. The Fair Debt Collection Practices Act (“the Act”) outlines specific rights that consumers have when dealing with collection agencies. For instance, the Act allows consumers to dispute a given debt in writing within 30 days from the initial contact on the part of the collection agency. If you dispute a debt in writing, the debt collector may not continue collection efforts until you receive verification of the debt. Furthermore, the Act requires that a debt collection agency must stop calling and/or writing to you, if you request in writing that it cease such activities. This Office suggests that you make such requests by certified mail through the United States Postal Service, keeping a copy of the request for your records.

Cosigner Release

You may wish to investigate whether the loan you cosigned allows you to be released from any further obligations under the loan. Some (but not all) loans allow a cosigner to be released or removed from the loan entirely. Under a cosigner release option, the main borrower usually must make a satisfactory repayment agreement, usually of a number of consecutive monthly payments. Loan servicers will perform a credit check to verify the borrower’s individual ability to repay the loan. If the lender determines the borrower is able to continue to make monthly payments, the lender may release the cosigner of any further loan repayment obligations. You may wish to review the loan agreement you signed or contact your lender to determine if this is an option available to you.

A Special Word about Student Loans

A common type of loan that may require a cosigner is private student loans. This is because students often have no track record of employment or financial solvency. Before you cosign a student loan, investigate whether cheaper and less risky loan products are available, including whether the student qualifies for federal student loans. According to one federal study, over 40 percent of the students who take out private student loans at some schools may qualify for federal student loans, which do not require cosigners and have lower rates.

If you have cosigned a student loan and are now facing collection activity because the student cannot repay the loan, please review the Attorney General’s publication Student Loan Handbook. It has more information on how to navigate student loan repayment problems.

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