What do you do when someone asks you to cosign a loan? Depends on how closely the person is related to you but - as an attorney - my advice generally is, "RUN!"
A customer walks into a showroom and finds a pricey car they want to buy. The dealer runs their credit and discovers it is less than stellar. The bank will not approve a loan to that borrower without a cosigner. There are other options, one of which is to find a less expensive car. But no one likes that. "Know anyone who might cosign the loan for you?"
Cosigning a loan is quite common in some settings and there is often a family relationship between the signers. Husband and wife, parent and child, or grandparent and grandchild. Of course, there is no requirement that there be any such relationship between the signers on the loan and I have seen roommates who have signed for one another, or neighbors, or even friends.
Many of these people did not understand the full implications of their actions. Which is all the more surprising considering that most modern loan documents contain warnings for cosigners. One sitting on my desk right now reads:
"A co-buyer is a person responsible for paying the entire debt."
If you are the cosigner, I would hope that you would recognize that you are also known as a "co-buyer" in this transaction. But what is not written in this sentence is just as ominous as what is.
It does not say, "We will go after the primary borrower and exhaust our remedies against them before we pursue the co-buyer for this debt." It does not say, "We will only come after you as a last resort."
In many states, the lender is legally allowed to come after you, the cosigner, first. And if they are allowed to, they will. After all, the primary borrower is the one who had the bad credit requiring a cosigner in the first place. Between the two of you, you are the one who is most likely collectible. In the interest of efficiency, why would they waste their time pursuing someone else first? They'll come after you.
And in the states where they can't come after you first? They can come after you once they have tried to collect from the primary borrower. Again, if the primary is not collectible - or has disappeared - you will find yourself in an ugly situation.
I have heard many horror stories over the years. Woman cosigns for her boyfriend who immediately disappears to another state with the collateral and never makes a payment. Man cosigns for his niece right before his sister reignites a family feud and tells her daughter to stop making payments Cosigner gets a notice in the mail that the vehicle was wrecked but had no insurance coverage; there is now an outstanding debt in need of payment. All my stories are from Michigan. Feel free to consult a local attorney and ask about the horror stories in your state.
Or, check out this handy-dandy warning from the Federal Trade Commission.
So, as your pen hovers over the co-buyer or co-signer signature line, read that sentence a few more times before you commit. "A co-buyer is a person responsible for paying the entire debt." Ask yourself how you will feel when the other buyer on the contract defaults and leaves you being chased by the lender. You okay with that? If it is a spouse or a near relative, you might be fine with it. Sign away. If the other party is a neighbor or someone you met in rehab, you may want to think about it some more. And RUN!
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Photo courtesy of author.
Steve Lehto is a writer and attorney and has been practicing consumer protection and lemon law for 23 years in Michigan. He taught Consumer Protection at the University of Detroit Mercy School of Law for ten years and wrote The Lemon Law Bible. He also wrote Chrysler's Turbine Car: The Rise and Fall of Detroit's Coolest Creation and The Great American Jet Pack: The Quest for the Ultimate Individual Lift Device.