Cosigning a loan is an important decision that carries with it many potential benefits. A person may voluntarily cosign on a loan with the primary borrower, who is typically a friend or relative. Cosigning allows the primary borrower to obtain a loan that they might not otherwise be qualified for due to restrictions, such as bad credit or a non-existing credit history, and gives the lender with some assurance that the loan will be paid for.
There may also be serious consequences to cosigning a loan, since, by cosigning the loan, the cosigner assumes liability in case the borrower is unable to make payments. In some instances, the cosigner may be held liable for the full amount of the loan, as well as late fees or costs associated with collection. If the cosigner is required to pay off the entire loan, this required repayment may negatively affect the credit history of the cosigner.
If the borrower is unable to make payments on the loan, the loan will go into default status with the lender. In such instances, the lender is legally entitled to obtain monetary payments from a cosigner. Thus, the lender may be able to sue the cosigner for the existing debt or have the cosigner's wages garnished in order to pay for the debt. For this reason it is important to discuss all the implications of cosigning with both the lender and the borrower whom you are cosigning with.
While it is best to be prepared for the worst case scenario before cosigning the loan, there are several steps you can take to recover losses incurred if the loan goes into default. Here are some options to consider in such a situation:
While cosigning on a loan is mostly a personal decision, it can have heavy consequences for the cosigner. Thus, you may wish to hire a lawyer before you cosign in order to obtain advice and counseling regarding your options. It is a good idea to enter into a written contract with the borrower in which you outline specific steps to take in the event that the borrower goes into default with the lender. An experienced lawyer can help you draft such a contract so that your interests will be protected beforehand.
Last Modified: 06-05-2014 11:00 AM PDTLaw Library Disclaimer
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