You ask excellent questions about the risks of co-signing on a loan.
The Co-Signer and Financial Responsibility
Although you may want to help a family member or friend who cannot qualify for the loan without a co-signer, it is important for you to understand what your obligations are when you co-sign on a loan. When you co-sign a loan, you take responsibility for repaying the loan if the primary borrower does not. This means you may repay the loan plus any late fees, interest, or other charges the lender has added if the lender cannot collect from the borrower.
FTC Rules About Co-Signing
According to the Federal Trade Commission (FTC), a co-signer must be presented with a detailed disclosure by the lender before he or she co-signs for the loan that explains the co-signer’s obligations.
The disclosure reads, "You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that 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. (Depending on your state, this may not apply. If state law forbids a creditor from collecting from a cosigner without first trying to collect from the primary debtor, this sentence may be crossed out or omitted altogether.) The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.
"This notice is not the contract that makes you liable for the debt."
As the disclosure explains, the co-signer is exposed to a lot of potential financial harm. Remember, even if the person you co-sign for has every desire and intention to repay the debt, if circumstances arise that make his/her repaying impossible, the co-signer is on the hook. Loss of income or job, an illness, or some other unforeseen event could impede the person’s ability to pay, leaving the co-signer the only with means to pay it back and fully liable to do so.
According to the FTC, "Studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan." The only reason the borrower is being asked for a co-signer is that the lender decided that the risk was too great to offer the loan without one. Sometimes, this is not due to the borrower having a poor credit history of bad payments, but due to the fact that the borrower has never had credit before. Having a loan co-signed for, if the loan is paid back as agreed, is a great way for a person without credit to establish credit worthiness, though that does not lessen the co-signer's responsibility in any way.
The Effect on Credit for the Co-Signer
Another impact you asked about was effect on the co-signer’s credit. There are two main effects. First, it will appear on your credit report, much like any other debt. If payment is late, for instance, that derogatory notation will appear on the your credit report, lowering your credit score. This can happen well before the co-signer has any idea that there is a problem, as the co-signer does not often receive a monthly billing statement.
Secondly, because the co-signed loan shows on the co-signer’s credit report, it may prevent the co-signer from obtaining credit. If a co-signer is planning to buy a house, car, or other large purchase during the life of the co-signed loan, it is a good idea to think about the implications. For instance, it is prudent to consider whether the co-signed loan would negatively affect the co-signer’s debt to income ratio and be a reason for not qualifying for the desired loan, even if all payments are made on time on the co-signed loan.
If You Decide to Co-Sign
Despite the risks involved, a person may decide to co-sign a loan, to help out a friend or family member. If the decision is made to co-sign, here are some things to keep in mind.
- Be certain that you can afford to make the payment on the loan, while maintaining your other financial obligations. If you cannot, you increase the risks that you could end up suffering collection efforts, including a wage garnishment, along with your credit rating suffering.
- If you are asked to pledge anything as security, such as a home or car, be aware that you could lose the asset, if the borrower defaults and you are not able to pay back the loan.
- You can make certain requests from the lender, which can offer you a degree of protection, though the lender does not have to grant them. For instance, you can ask the lender to make it so that you are responsible only for the principal of the loan, so you are not liable for late charges and collection fees. You can also ask that the lender notify you if a payment is late, so you can try to fix the problem before it gets out of hand and hurts you. In either of these cases, get the assurance from the lender in writing, or it is not going to help you.
- Keep all the records and paperwork associated with the loan. This way, if there is any dispute, you have records. Because the lender is not required to give these records to you, make sure to get copies from the borrower.
- Because rules can vary from state to state, check with the consumer rights department in your state of residence.
The FTC details facts for consumers about co-signing.
I hope this information helps you Find. Learn & Save.
Best,
Bill
San Diego, CA | May 02, 2013
May 03, 2013
- Lenders are not required to report payment information about their borrowers to the consumer credit reporting agencies. However, if they do, the reports must be accurate. Some auto finance companies report information to the consumer credit reporting agencies, and others — such as buy-here-pay-here dealers and title lenders — tend not to. If your lender reports information about your loan to the consumer credit reporting agencies, then this loan's payment status will appear in both your credit report and that of your co-signer's.
- This loan has two impacts on your co-signer's credit report. First, if you become delinquent on your payments, this will drag your co-signer's credit score down. Second, if your co-signer applies for a loan, this loan will be included in his or her debt-to-income (DTI) ratio.
- The biggest reason for your co-signer to want you to refinance the loan in your name alone is to remove his or her liability for the loan. Should you default, the lender may collect up to 100% of the balance due from either person who signed the loan.
On to your questions:
- Accurate information cannot be removed from a credit report. Here, the co-signer has liability for this loan, which has a potential impact on the co-signer's ability to qualify for a future loan. I do not see a way for your co-signer to dispute this information and have the loan be removed from his or her credit report.
- You are on the right track in asking about refinancing this loan. I will assume you did not qualify for a loan by yourself three months ago, otherwise it is likely you would have avoided involving a co-signer. The question you should be asking is, "Has my creditworthiness improved enough in three months for me to qualify for a loan on my own?" Without seeing your credit score, looking at your DTI, and understanding your income history, I cannot answer your question. Talk to a loan officer at your bank or credit union to understand what you need to do to qualify for a vehicle refinance.
If your issue was a thin credit file, in other words you do not have a long credit history, then three months on one loan will probably not be enough for you to qualify for a refinance. However, each auto lender has its own qualifications for refinances, and you need to talk to several lenders to learn if you qualify.
Los Angeles, CA | February 13, 2013
February 14, 2013
- The next time the collection agent calls, gather all of the contact information you have about his or her employer, including name, mailing address, and telephone number. Then send the collection agent a debt validation notice. Follow the hyperlink I just mentioned to learn how.
- Call your nephew and ask if he is current on the debt.
If your co-signer is current on his payments, then you are dealing with a fake debt collector.
Stockton, CA | January 28, 2013
January 28, 2013
As your goal is to build a strong credit score, I recommend that you open some other credit accounts (credit cards, for instance), so that you have more active accounts reporting. Do not run up debt on your new cards, but make occasional purchases and pay them off in full.
Columbia, SC | September 19, 2012
September 19, 2012
You can try to speak directly with the creditor, to see if they can change how the account was reported to the credit bureaus.
North Sarasota, FL | July 26, 2012
July 26, 2012
Dispute the false information with each of the three credit reporting agencies that report it.
Gainesville, FL | July 17, 2012
July 17, 2012
Boston, MA | June 25, 2012
- If he does cosign for me, will I get that 2.9% as well, or will it take both scores into consideration and be somewhere in between our interest rate quotes?
- Would it be closer to his quote or somewhere in the middle?
Thank you for the help!
June 25, 2012
Boston, MA | June 25, 2012
June 25, 2012
One caveat: Once you start shopping in earnest, narrow your focus of lending candidates and complete applications at several banks or credit unions in a brief period of time — several days at the most. Doing so will cause FICO to treat multiple credit applications, called hard pulls in the credit business, as a single pull. Hard pulls spaced out over time will cause a slight decrease in a person's credit score. If you are already borderline, this will push your score further south.
Kansas City, MO | April 24, 2012
April 24, 2012
My advice? Come clean with your co-signer. You need not reveal all of the gory details, but you can say, "I got in over my head with credit cards, and had some late payments, but all of my cards have either been paid off or current since (the date you got it together) and I learned my lesson." Or words to that effect. We all screw up at something at some point in our lives. It's embarrassing at the time, and sometimes we need the help of our family and friends to work through the consequences. But if you learn, admit your mistake, and don't repeat it, our friends and family forgive and forget.
El Mirage, CA | April 21, 2012
April 25, 2012
The fact that the debt is now at $0 balance is good for two reasons. One, you won't face any collection efforts. Two, a paid-off collection account is better for your credit than one with a balance owing.
Right now, you just need to take basic steps to improve your credit score.
San Bernardino, CA | April 20, 2012
April 20, 2012
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