When you co-sign a loan for someone, you are taking on risk on with no return. When lenders refuse to give a loan to someone it is because they are too much of a risk. Consider the following about co-signing or guaranteeing a loan for someone else:
- The lender does not have to go after the person you are co-signing for first if there is a default on the loan. Lenders actually often go after you first because they know you are more likely to have the means to pay off the loan. There is no legal obligation to go after the other person first.
- You are not protected even if the lender goes after the other person first. Any “protection” here is illusionary. Often when someone cannot make a payment on a loan it is because they are insolvent or have disappeared. The lender will then be free to go after you for the full amount of the loan.
- The lender will not necessarily let you know if there is a missed payment so that you can correct the problem. Lenders have no obligation to notify the co-signor or guarantee about the status of the loan unless it is written in to the loan documents. If you are going to co-sign make sure that the contract requires that you receive regular notice as to the status of the loan. By the time people find out that loan payments have not been made, it is often too late and legal actions such as foreclosure have already started.
- If your name is on the title, you are liable for any problems that arise from its use. Many times parents decide if they are going to co-sign on a loan they want some type of control over the asset that is being bought by the loan. They will insist on putting their name on the title or deed. By doing this they have just agreed to be liable for any problems that arise from the use of the automobile or house. Someone hit by the automobile or that slips and falls on the property can go after them as an owner and probably will because they usually have the deeper pockets.
- Even if you do not put your name on the title, you can still have added liability. In Vermont there was a case where a grandmother co-signed for a grandson to get an auto loan. The grandmother knew that her grandson was a bad driver. Soon afterward, she was held liable when he hit someone with the new car.
- You do not have to be liable for the entire loan. When you guarantee a loan you do not have to guarantee the entire loan. It depends on what you can get the lender to agree to. You may only have to guarantee the loan amount and not the late fees or attorney fees or only part of the loan. However, if you co-sign you agree to pay everything that the person you are co-signing for would have to pay.
When you are asked by your child to co-sign or guarantee a loan for them because they do not have the credit to get the loan, be very careful. In deciding that you will co-sign you may be taking on more than you realize. When you co-sign or guarantee a loan for someone you are taking on risk on with no return. Along with the monetary risk you may be also risking your relationship with the person you are co-signing or guaranteeing for. If the loan goes bad that relationship is often damaged, so our basic advice is to avoid co-signing or guaranteeing a loan.