A relative or close friend needs help, and they've asked you to cosign their loan. Should you do it? The answer's up to you. But, before you sign on the dotted line, watch this video clip to ensure that you're fully aware of risks you're taking and the responsibilities you're assuming. A little thought beforehand can save you major headaches down the road. Access all the material referenced in this video and more at Cosign a Loan.

 

 

Cosign a Loan Video Transcript

A relative or close friend needs help, and they've asked you to cosign their loan. Should you do it? The answer's up to you. But, before you sign on the dotted line, make sure you are fully aware of risks you're taking and the responsibilities you may be assuming. A little thought beforehand can save you legal hassles down the road.

What does it mean to be a cosigner? Simply put, you are a borrower on the loan, without receiving the proceeds from that loan!

So if the primary borrower defaults on the payments, you are 100% responsible for the loan's repayment. And, in some cases, the lender can request payment from the cosigner at any time, whether or not the primary borrower is actually in default on that loan.

In addition, a cosigner will be, in most cases, responsible for any late charges, penalties and legal fees associated with a default. The lender can sue you and force the sale of your property to pay off the debt. You can end up with a black mark on your credit history, which may affect what future creditors are willing to loan you.

That's why it's critical to think through your decision before you cosign any loan. If there is any doubt that the person will make payments, or, if you cannot afford to repay the loan with your own money, you should NOT cosign the loan.

If you do decide to cosign a loan, try to negotiate the terms of the agreement with the lender to reduce the amount you may owe:

• Try to limit your liability to the unpaid principal at the time of the default.
• See if the lender will notify you if a payment is late.
• Be sure to get copies of all loan documents and copies of sales receipts and warranties related to the loan.

What if your cosigned loan goes into default?

On a consumer item, such as a car, it may make sense to sell the item and make up the difference on the loan. In many cases, it's a cheaper way to maintain your good credit rating and have the loan agreement satisfied.

On a credit card, try to negotiate the repayment of a portion that is owed. And, make sure your negotiation includes a clean credit history.

Obtain a promissory note from the primary borrower for the amount you've paid on the loan and create a repayment schedule.

If all else fails, you may need to contact an attorney.

Need help finding one? Visit the "Find a Lawyer" section on lawyers.com.

Have questions about other life events? Then go to the Life Events section on lawyers.com for more helpful video tips.