Important Things to Keep In Mind When Co-Signing

Things to keep in mind when you do cosign on a loan

Although it is never really recommended, there are situations and circumstances in which you may want to cosign alone application. The commonest situation is parents wanting to help out a child get their first loan or even helping out a close friend when he needs help.

Consider the following points before you cosign:

  1. Ensure that you can afford to pay the loan in case the primary borrower cannot or does not in the future. Failing to do so could mean that you get sued in a court of law, your property or wages are used to pay off the loan as well as your credit rating and taking a dent.
  2. You should understand that even though you may not be asked to repay the debt, the debt will show as an additional liability on your credit file. If the debt is large enough, it may hinder your chances of qualifying for credit on your own because the future creditors will consider the cosigned
  3. Be careful when you pledge your property to secure a cosigned loan such as a tangible assets like your automobile. If the borrower defaults and you do not pay back the debt, you could use these items.
  4. You can consider asking the lender to give you specific and different terms than the primary borrower. For example, you might ask to borrow to limit your liability to the principal on the loan and not include any late charges, court fees, attorney fees or interest charges. If the lender agrees to such an agreement, have him put it down in written in the contract. You can also ask the lender to calculate the amount of money that you might owe in the future if the primary borrower defaults. The lender is not required to do so as per the law but he may if you asked.
  5. You should put in a clause in the contract that says that you are to be notified immediately when the borrower misses a payment. This could give you the opportunity to deal with the problem quickly in the future. Many cosigners are notified when the debt has gone unpaid for a long amount of time and the amount to be repaid has increased substantially.
  6. Make sure that you get the copies of all important documents such as the loan contract, the truth in lending disclosure statement and any warranties when you are cosigning for a purchase. You may need these documents if there is a dispute between the borrower and the seller. The lender is not required to give you these papers as per the law and you may need to get them directly from the primary borrower.
  7. Different state laws may have slightly different provisions for the rights of a cosigner. Check your state law for these updates.

In the end, remember that in case you need help when you have cosigned on a loan, you can go to the Federal Trade Commission. The Federal Trade Commission works to prevent fraudulent, deceptive and unfair business practices in the marketplace as to provide information to help the consumer spot, stop and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call on 1-866-653-4261.

The Federal Trade Commission helps and fights unfair business practices and helps to resolve consumer issues by entering Internet, telemarketing, identity theft and other fraud related complaints into consumer Sentinel which is a secure online database available to hundreds of civil and criminal law enforcement agencies in the US as well as abroad.

Your Federal Rights When Cosigning a Loan Application

The FTC lays down certain rules and regulations concerning someone who is cosigning on a loan application. The most notable among these is the requirement for the creditor to provide you with a cosingner’s notice making you aware of the responisibilty that you are ndertaking.

Secondly, in certain states the creditor is prohibited to recover the money from the cosigner without making substantial efforts to recover it from the primary borrower first.

It is agreed that the situation when you need to go sign on a loan application for someone else does not arise too often. But what would you do in case it does? Many people end up cosigning on a loan application for a friend or close family in order to help them out. A common example is parents signing on a loan application for the children to help them start out with credit. Whatever your circumstance is, you must understand exactly what co-signing involves. Under the federal law, a creditor is supposed to inform you of all the obligations and the financial repercussions of signing on somebody else’s loan application.

The cosigner is usually presented with a notice that states the following:

“You’re 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 fee or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower.

(Depending upon the state and the prevalent law that determines debt collection, this line may either be scratched out or may not be there at all. Certain states prohibit the creditor from trying to collect from the cosigner without first making ample and suitable efforts to recover the money from the primary debt holder).

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.”

This notice in itself should tell you enough about the possible consequences of signing on somebody else’s loan application. It does not matter whether the application is for a personal loan, home loan or a credit card. Co-signing makes you equally responsible to pay back the debt in case the primary borrower does not. Of course, the bigger the debt amount, the more liability you are undertaking.

Studies and reports of certain types of lenders have shown that as many as three out of four cosigners are required to pay back the loan on which the primary holder defaults. Cosigning on a loan application simply means that the lender is unwilling to take the risk off giving the loan to the primary borrower because he does not consider him/her creditworthy. So basically the lender is asking you to take on the risk that he would not in his professional capacity as a lender.

While some states prohibit direct collection from the cosigner, most of the states permit a creditor to collect immediately from you without pursuing the borrower first. So when a friend or a family member for whom you have cosigned defaults on the loan, the creditor might try to recover the debt from your straightaway if he feels that you are a better candidate for recovery. After all, if the primary borrower has defaulted on the loan, then the odds are that he does not have the money to pay back the creditor in the first place.

A majority of borrowers do not deliberately defaulted on a loan when they have the resources to pay it off. You should also consider the fact that the amount owed by the primary borrower may be increased by other fees and charges such as late charges, interest as well as a lawyer’s fee if the lender decides to sue in a court of law.

Depending upon the kind of debt and your liability, if the lender wins the case in court, your wages may be garnished or your property may be liquidated to pay off the debt.

Reasons Why You Should Never Cosign A Loan Application

Why you should not, in the best of situations, cosign on another’s loan application.

It could be a credit card for a girlfriend or a loan for a loved one. It may even be your own family where your child or a spouse may want you to help them get a credit card. Because you love the person and trust them you may be inclined to offer your signature without realizing the responsibility that you are taking. Before you cosign on an application that someone else make sure you understand all the reasons why you should never cosign for others.

The number one thing that you should understand is that there is a reason why the other person cannot get approved for credit on its own. The lack of credit history or presence of make a credit information may be preventing him from getting qualify for credit on his own. This means that the lender is not consider the person responsible enough to qualify for credit individually. If the creditor having used the tools and resources available to him for predicting the creditworthiness of a person has determined that the person is a high-risk the maybe you should give yourself a pause to consider the same thing. If a creditor does not think that your loved one will pay on time, they require a cosigner. A decision that a lender usually makes for the consumer is based solely on facts and data that he has access to. This usually comes from the credit report of the applicant and the documents that applicant provides such as proof of income, employment, residential status etc.

This means that your loved one could very well lose control of his debt situation in the future and leave you responsible for the money that he or she has spent.

Whenever you cosign on a loan application you are just as responsible for the debt as you the person. You are also completely responsible for the whole amount. Many people think that the burden of the debt is broken up into two parts since there are two people on the credit card account. But the truth is that each single person is completely responsible towards making the complete payment. If your loved one is late in making the payments then it’s the same as you’ve been late on the payment and the same gets reported on the credit file of both the people. This will damage your credit score. Your debts to income ratio will also increase which will hinder your ability to get a loan free yourself in the future if and when the need arises.

In case of the account getting sold to a collection agency, the collection agency is in their right to try recovering the money from either of the joint account holder. They are not mandated by the law to try and recover the money from the family account holder. They can and may try and recover the money from the cosigner witches you because you were the one with the better credit rating and hence a better bet for a successful recovery. You can also be sued in a court of law where a judgment entered against you will not only require you to pay the debt but also be recorded on the credit report which is one of the worst entries that can find their way on your credit file. If your loved one happens to bankrupt the debt he or she will be let off the hook for it. You one the other hand will be solely responsible for paying the debt.

This does not mean that the person who is asking for your help in cosigning for the reputation is doing it with the intention of seeing the payments in the future. But there are risks involved with cosigning on an application and doing it for a person who is unable to qualify for credit on their own is something that you should think about carefully.

If the person involved is the near and dear friend or family then perhaps it would be better if you help the person develop good spending habits and build a good credit score so that they can qualify for credit on their own.

You may be thinking that you are doing a good deed by helping someone out get credit at any or building a good credit history. Do not do it because it could result in big financial problems for you.

It is a common scenario where a parent, partner or ex-spouse than ends up with a large amount of debt from their Child, partner or ex-spouse respectively. It’s one thing finding yourself under debt due to your own credit mismanagement but it is doubly worse when it is somebody else’s debt and you are fully responsible for the payment. For those of you who are contemplating the thought of helping out a partner, parent or sibling or child by cosigning on the loan do not to do it as adding your name to somebody else’s loan is a very serious matter. Tying your own financial history to a natural history of someone else is a serious decision and could end up in a financial disaster for you ought of no-fault of your own except for the fact that you did not think through the decision of cosigning for someone else.

Cosigning on somebody else’s loan makes you fully responsible for the entire amount of the loan. The bank or the creditor is free to try recovery from either of the cosigners and with whom they feel they have a greater chance of success in getting the money back.

This means that even though you are a cosigner, you may be the one with the shining credit history and in the lender’s eye, more liable to pay the debt rather than the primary applicant.

The very fact that a lender needed a cosigner in the first place is a sign that they do not think that the primary applicant is a good enough credit risk.

When parents co-sign for their children and then the child happens to default, the lender is aware of the fact that the defaulter may not care much about the dent on his credit rating. He/she is young and does not much credit history to start with. Young people find it easier to ignore credit rating issues simply because they do not give it much of a thought or think that they will have plenty of opportunity to build it in the future.
However, the parents are probably more serious about their credit rating since several of their financial affairs may depend on it like, credit card rates, insurance premiums, future plans for a personal loan, mortgage or auto loan. Therefore, the lender might just prefer to collect the debt from the parents simply because he thinks that they are more liable to pay up to avoid the negative mark against their credit file.
It is also easier to track and communicate with the parents since they are the ones who are in all likelihood settled down in a home. The kids can be harder to track when in college and soon after as they are likely to be moving to different places.

When you cosign for the person you are putting your credit rating at risk. You are signing a legal contract that holds you completely responsible for the entire debt. If there is a delinquency on the debt most of the cosigner’s do not learn about it till it’s very late. By the time a cosigner finds out about the defaulting primary for the debt is already many months late and has been reported to the credit bureau. A delinquent or a charged off account on a credit report is of the worst entries that can be present. Apart from that the bank can also sue you in a court of law where it can force the sale of your assets such as your house in order to recover the money of the loan. Most of the legal documents and agreements offer loans also allow the bank to charge you its own legal fees in collecting the debt from you.

Most of the time the terms and conditions of a loan is printed in very fine rent. Most of the people will sign the document without reading it. The truth is that while people resume that the lender will only come after the cosigner once they have exhausted and failed in every means of collecting from the primary borrower, the truth is that the lender will come after whoever it feels it has the best chance to recover from. And since you are the person with the better credit rating who cosigners are guaranteed, the lender may decide to come after you without even trying to recover the money from the primary lender first.

Another effect of cosigning for a loan is that it increases your debt to income ratio. Lenders look at the debt to income ratio before approving any further loan to the consumer. It is possible that since your debt to income ratio is already high due to the loan that you co-signed on someone else your own loan application may get denied in the future.

If you’re already stuck with someone else’s debt you may have no other option but to pay it off. What you can do is try and negotiate with the creditor or the credit card company. Most of the consumers do not know and understand that you can negotiate with credit card companies to agree on how much you will pay. You can reduce the payment for the given debt to 75 or even 50%. Settling the debt with the creditor will probably not clean up your credit history completely but having a settled and paid off status on an account is better than a charged off account. You will also be able to get rid of the collection agency who might be trying to recover the debt from you.

If you are planning to cosign on a credit card for your teenage child in order to help them get the first credit card and build credit history and make sure to provide them with adequate credit education. High school seniors and College students are bombarded with credit card offers. Since an average adult already has plenty of credit cards teenagers, high school seniors and College students comprised the untapped market. The credit card companies love students because they figure that they are a good risk because parents stand behind their debt. Students that are absorbed by a credit card company into using their credit card earlier on also tend to make loyal customers for the future as well. And

Pros and Cons of Joint Credit Cards Accounts With Friends and Spouse

There are advantages and disadvantages of having joint credit cards with another person. Here are some of the advantages.

Have a common bill — having a joint credit card allows you to dispense with one extra bill. Ieper who lived under the same roof usually has one electricity Bill, one telephone bill etc. So it may only make sense to have one credit card bill as well especially when you are willing to share the expenses.

Help someone build a credit score — you can help someone who doesn’t have a credit history such as one of your kids build a credit score by having them as a joint account user on your credit card. The postal history from the credit card account will get reported on the credit report of both people who are present as joint account holders. Since authorized users on the credit card are no longer counted by many credit scoring models having someone as a joint account user on the credit card is the best way to help them build their credit history.

Help someone gets a credit card — for people who do not have a sufficient credit history or have an unsatisfactory credit rating, getting their credit application cosign from someone with a better credit score may be the only option. You can help someone like your own child get their first credit card by cosigning and becoming a joint account user on their credit card. If you have a strong credit history and credit rating then this may also allow the person you are cosigning with to get a better deal with the interest rate. Lenders typically tended to charge people with a lower credit score a higher rate of interest.

Disadvantages of  a Joint Credit Card Account

Legal Responsibility — whenever you sign as a cosigner on any account with another person it makes you fully and completely liable for the debt. This means that while you could have signed on a credit card application to help someone, you may be held liable for their debt in the future if they are unable to pay.

Relationship Problems — money matters are known to cause relationship problems whenever they are involved. Sharing a credit card would prove to be pretty much the same.

Sharing credit cards are more difficult to handle after breakups or divorce — whether you are separated or divorced both the people who are joint account holders on a credit card can be held liable for the debt. Each means that if your ex-spouse or ex-girlfriend or boyfriend has not paid the debt on the credit card you may be liable to pay it off. It’s does not matter who charged the money on the credit card because the creditor is within his rights to collect the money from whoever he thinks he has the better chance of recovery.

Vendetta – it may sound churlish but it is known to happen that after a breakup one of the credit card holders can go on a spending spree to get revenge on the other partner. What any people do not realize is that charging up a huge debt on the credit card just to get the cosigner under debt hurts the credit history of both the people when the debt is not paid or gets reported as late. Of course many times the person seeking revenge accounts on the fact that the other partner will not want the credit history to be damaged so will end up having to pay the money.

What Is Your Liability As A Cosigner

Your liability when you cosign on a loan application for some one is 100% of the amount owed to the lender.

Many people make the classic mistake of thinking that they are liable for only half the amount. They also believe that they will be able to remove the debt from their record by explaining that it was a debt meant for someone else and they were just cosigning to help a friend or relative.

It is a general and very good advice that all people who are thinking of cosigning a loan for someone should understand the decision completely before making it. A cosigner is completely responsible for a debt in the scenario where the original applicant is unable to make the payment. A cosigner is just as responsible as the primary applicant and for the entire sum of money.  No, when you cosign, you are signing on a contract that you will take full responsibility of the entire sum of the loan if the other person does not pay.

There are many situations where people do cosign. The commonest are a parent cosigning for a child, a husband and wife cosigning on a joint account and a person cosigning for someone they are in a relationship with.

Out of these, the first two involve close family relations, so one can feel a little more comfortable about cosigning for a person. However, you need to be more cautious when you cosigning for a girlfriend or a boyfriend. One hopes that things work for the both of you and you have a happy life together, but there are no guarantees in life for certain matters. Do not just give in to your heart and sign on the dotted line for that loan, but think pragmatically. If for reason the two of you decide to part ways, you might not only be left with a broken heart, but with a huge liability if the other partner refuses to pay the loan.

That will severely impact your credit rating and you will not have much of recourse apart from paying the amount or settling it with the lender. If you don’t, you risk having the account go in to collections or being sued by the lender in a court of law, both of which are worse scenarios.

Even for cosigning for a family relation, people should understand that there is potential of credit score damage there. In most cases, it is the parent that has a strong credit history. Which is why the lenders are more willing to give out a loan when a parent cosigns. The son or the daughter may just be starting out and may not have a history at all. If later on the son or the daughter has problems with the loan account, the good history of the parent will get marred.

The creditor may choose to come after the parent for the repayment as he may decide that they are more liable to be able to pay back the money than the child. If the lender sends the debt to a collection agency, then the collection people may use the same tactic. They may feel that it will be easier to recover the money from the parents than the child.

There have been situations where the parent has been left with a loan that they cosigned on with their children that they cannot afford to pay back since they are retired and do not have that kind of an income.

Effect of Multiple Enquiries For a Cosigner

When somebody call signs with you on an application for credit the only way that multiple enquiries can happen on the credit report of the cosigner is when the creditor indulges in a practice called shotgunning.

An easy example of this practice is when you apply for an automobile loan. Let’s say you had some one cosign on the application of that you made for an automobile loan with the automobile dealer. When this dealer sense your application to various lenders in order to find the best loan deal for you multiple enquiries will result on your credit report as well as that of the person who cosigned on the application.

This is however not a reason for you or the cosigner too early as the credit scoring model now recognizes this practice and considers multiple enquiries made for the same loan within a span of 14 days as one single enquiry, regardless of how many enquiries are made. Your credit score as well as the person who cosigned with you will not be affected due to the multiple enquiries resulting from the application for the same loan.

What you and the cosigner should be concerned about is your ability to pay off the loan in the future as late payments or other problems in repaying the loan in the future will be reported on both your credit histories and impact the credit score for both you and the cosigner.

Can You Remove Yourself As a Cosigner On A Credit Card Account?

The decision to cosign with someone on their credit card account should be taken after much thought and consideration. Usually a credit card company requires a person to cosign when the person applying for the credit does not have a good enough credit history and financial credentials to qualify for the credit card individually. If you cosigned on a credit card account with someone than you took on the guarantee of paying off the debt of the principal owner of the credit card in case he were to default on the debt.

For this reason even if you want to remove yourself from a credit card account after cosigning on it you might not be able to do so. Since the credit card company considered the primary applicant as a bad risk requiring you to sign as a joint account for the full security they will not allow the credit card accounts to function without you providing the Guaranty on the debt amount.

The only recourse that might be open to you in this case is to request the primary applicant for whom you cosigned on the credit card account to pay off the balance on the credit card and request the credit card company to close the account. He or she should then apply for a new credit card account on an individual basis solely on the strength of their credit history and credit score.

Relationship Status Does Not Change Cosigner’s Obligations

Whenever you cosigned for a loan with your boyfriend, the fiancé or somebody you are in a relationship with you should be aware of the fact that the nature of your personal relationship has no bearing on the contract that you signed.  A contract remains a contract even if the relationship does not work out ceases to exist in the future.  If you cosigned with your partner on a loan your obligation to the debt remains even though the relationship might end.

In fact, being a cosigner on an account with someone with whom you no longer have a relationship can get sticky and complicated. It is difficult to dissolve the joint account in proportion to who owes what when you break up with your boyfriend or girlfriend. These matter are handled legally when a marriage breaks up. But there is no such formal recourse for a relationship.

Not only can you be left with a debt that is not yours, the ex may continue to charge the credit cards just to be malicious. He or she might not care about their credit rating and punishing you might seem more important. The creditor may not close such a credit card account till the time that the balance is fully paid off, allowing the ex to continue charging the account even more.

Special thought should be given to becoming a joint account holder and taking responsibility for a debt if there is no legal relationship such as marriage or family relationships such as sibling etc.  Even then cosigning a loan application should not be taken lightly.  Since you have already cosigned the loan application you cannot get out of it save by personal and legal negotiation with the person you cosigned for.

Save from that you should get in touch with the creditor and make sure you understand the terms of repayment and deadlines.  Make sure that you provide them with your contact information on the record in case your partner defaults on the debt.  The last thing you want is a surprise several years from now if payments stop and those missed payments have gone and ruined your credit rating.  Your partner may be gone at the debt will not go away.

The Difference between an Authorized User and a Cosigner

The major difference between an authorized user and a cosigned on a credit card is that of the liability that the person shares.  With a credit card you are most commonly known as a joint account holder rather than a cosigner.  Your obligation towards the debt is the same as a joint account holder which means that if the primary account holder is unable to pay off the debt you are legally responsible to pay it off.  The same does not hold true for an authorized user.  An authorized user has no obligation whatsoever towards the repayment of the debt.  That is the prime responsibility of the credit card holder.

So if you are a joint account holder with your ex-wife or ex-husband’s credit card account that you may be liable to pay of any debt that he or she has raised in the past and has not paid off.  However being and authorized use your user on your ex-wife for ex-husband’s credit card does not make you liable for any balance that has been charged to the card.  It is a simple matter to get an authorized account taken off from the cut.  You can contact the credit cut company and have you removed as an authorized user in which case the account will cease to be reported in your credit report as well.

Marriage can sometimes complicated this issue because certain states have community property loss.  You should review your contract carefully all contact the credit card company to determine whether you are authorized user or a joint account holder.  The state community laws may automatically make any accounts entered during marriage as joint accounts.  If that is the case then the only way to be removed as responsible party for the debt is to contact the credit card company and negotiated with it to change the contract.