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I have been asked to co-sign on a loan. Should I?

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Co-signing is risky business. Even if you have enough money in an account to cover the loan you are asked to co-sign, you must consider the long-term consequences. It is crucial to understand that co-signing is the same as borrowing money. It is an important financial decision and should be made for sound financial reasons. Consider these risks:

· If you co-sign on a credit card or loan and the borrower defaults, you are obligated to repay the entire balance. Do not co-sign unless you are willing and able to pay the entire debt. In addition, you may also be required to pay late fees or collection costs.

· Be aware that in some states, including Utah, the creditor can collect the debt from the co-signer without first trying to collect from the primary borrower.

· Creditors can use the same collection methods against a co-signer as those used against a borrower, such as suing or garnishing wages. If the debt is ever in default, it can become part of a co-signer’s credit record for at least seven years.

· It is possible for a co-signer to put the asset at risk. For instance, if parents co-sign on a teen's car and they later file for bankruptcy, the teen's car will be included with the parent's assets and could be liquidated.

If you agree to co-sign a loan or decide to loan money to a relative or friend, it is wise to use a legal contract. A contract to seal a loan and repayment agreement is generally recommended. Ask yourself: if this person should die, would I want his or her estate to repay the loan? If the answer is yes, you should have a legal contract. You can buy contract forms at many office supply stores. For a real estate loan, business loan or other sizable loan, consult an attorney.

In addition to the potential financial risks, decide if you are willing to risk the relationship difficulties that will likely arise with the person whose loan you repay.

Consider this experience. Recently, a woman was asked by her sister to co-sign on a home loan so she could receive a lower interest rate. (This should have been a warning. Consumers who do not qualify for lower interest rates have either mismanaged their credit in the past or have not yet established a credit history.) Because she was not asked to pay anything, the woman co-signed to help her sister, and the contract was written at a lower interest rate. Unfortunately, after a few months, the woman was notified by the lending institution that her sister had not made payments for several months and she, as the co-signer, must now pay. The two extended families were torn apart by the incident, and the woman is facing devastating financial consequences from co-signing, as well as the loss of her previously excellent credit score.

Most of us want to help our family and friends and find it hard to say no, even if we know it is the right answer. Think about it now and prepare before the need arises. A tough love “no” may be the best response for both parties.

Posted on 28 Oct 2005

Judy Harris
Family and Consumer Science Agent, Utah County

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