Things You Should Consider When Co-signing a Loan


Co-signer Considerations

There are many things you should consider before co-signing a loan with someone. Just as with any other legal agreement, when you co-sign a loan agreement you have specific obligations under the agreement that your lender (“creditor”) will make you aware of including:

  • By co-signing, you are being asked to guarantee this debt. If the borrower does not pay the debt, you will have to. Do 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. If this debt is ever in default, that fact may become a part of your credit record.

Before You Co-sign

Despite the risks, there may be times when you want to co-sign. Your child may need a first loan, or a close friend may need help. You will want to consider how guaranteeing a debt might affect your financial well-being.

  • Can you afford to pay the loan? Even if you're not asked to repay the debt, your liability for the loan may keep you from getting other credit. Creditors will consider the co-signed loan as one of your obligations.
  • Before you pledge your car or other property to secure the loan, make sure you understand the consequences. 
  • Ask the creditor to agree to notify you in writing if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
  • If you're co-signing for a purchase, you will want to get copies of all important papers, like the loan contract, the Truth-in-Lending Disclosure Statement, and warranties. These documents may come in handy if there's a dispute between the borrower and the seller. The creditor doesn’t have to give you these papers; you may have to get copies from the borrower.
  • Check your state law for additional co-signer rights.

If you have any questions about financing, please contact a Baylake Bank lender for more information.