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Co-signing a loan

Perhaps your best friend asks you to co-sign a loan for the new car he’s desperate to own. Or maybe your sister won’t qualify for a mortgage on her first home unless you co-sign the loan. There’s only one thing for a good friend or devoted family member like you to do. But before you co-sign a loan for anyone, make sure you understand your obligations and risks.

Your obligations
When you co-sign a loan, you are signing an agreement that you will personally guarantee the debt. If your friend takes off in the new car and leaves no forwarding address, or if your sister neglects her mortgage payments, you are responsible for repaying the car dealership, financial institution or other lender -- in full.

That creditor can collect from you by demanding the money or taking you to court to garnishee your wages or bank account or to seize any property you have pledged. You could also be on the hook for legal fees, late fees and collection costs. And depending on what state you live in, the creditor may even have the right to collect a missed payment from you without trying to collect from the borrower first.

Plus, in the eyes of any future creditors, this debt is yours. Left unpaid, it will stain your credit record, potentially preventing you from obtaining other credit for yourself.

How to protect yourself
Before co-signing any loan, protect yourself with the following:
- Ask the borrower about his or her credit problems, the purpose of the loan, type of loan, terms of the loan and to see his or her credit report.

- Make sure you can afford to repay the loan without sacrificing your own lifestyle.

- Never pledge property you don’t want to lose -- such as your own home, car or other asset.

- Try to negotiate a written agreement between you and the lender. Some lenders might be willing to specify the maximum amount of money you could owe. Others might agree to take you off the hook for late fees, court costs and so on. Still others might agree to notify you if the borrower is late or misses a payment so you can nip a financial problem in the bud with your friend or family member rather than waiting until you have to repay the entire loan.

- Make sure your name is on the title as a co-owner if you are being asked to co-sign for a property loan. Should the borrower default, you may be able to sell the property to repay the debt.

- Don’t co-sign a loan if you will soon need to go out and borrow money for yourself. If your co-borrower misses payments or defaults, the loan will negatively impact your credit rating by showing up on your credit record as an unpaid debt just as you’re trying to negotiate your own loan.

- Ask the borrower to provide you with copies of the loan contract and, if you’re co-signing for a car or other item, the warranty. That way, you’ll know your exact obligations, and have some protection, if your friend has a legitimate dispute with the dealership or seller.

How to get off the hook
There are only two ways to have your name removed from a loan you have co-signed. You can repay it in full. Or sometimes, if the borrower has been making payments on time for a reasonable period, the lender might agree to take your name off the loan. But this is strictly up to the lender. The bottom line is if you co-sign a loan, you can’t get off the hook until the loan is paid in full or the lender lets you off.

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