Family Fundamentals: Know risks before you decide to co-sign on a loan

Some good friends asked us to co-sign on a loan to allow them to get a lower interest rate. They said they won’t have any problem making payments (especially with the lower rate). My husband and I disagree about this. Where can we find information about the risks we’d be taking on?

Your friends are asking for a significant favor, and you’re smart to investigate the ramifications of being a co-signer on a loan. It’s a lot more than acting as a character reference. It means you agree to repay the loan in full if your friends can’t or won’t.

Several agencies have information about what you need to consider before making a decision, including the Consumer Financial Protection Bureau (www.consumerfinance.gov), the Federal Trade Commission (www.ftc.gov) and the Federal Deposit Insurance Corporation (www.fdic.gov).

Some things to know before deciding whether or not to act as a co-signer:

• Your credit score will be affected if your friends are late in making payments.
• If your friends miss one payment, the lender can come to you immediately instead of sending late notices to them.
• You will not have any ownership rights to the property purchased with the loan. So, if your friends buy a car with that loaned money and their financial circumstances change preventing them from making payments, they could keep the car while you pay off the loan.
• You may be responsible not only for the principal and interest, but also for late payment fees and other collection costs.
• Depending on the terms of the loan, your wages could be garnished if neither you nor your friends make payments.
• If your friends die and their estate doesn’t pay off the loan, you would be responsible for doing so.
• If you die, the co-signing responsibility doesn’t die with you. Your estate would become the co-signer.
• If you die or enter bankruptcy, the lender could demand immediate repayment of the loan from your friend.
• Even if nothing goes wrong, your ability to get a loan yourself in the future could be affected, because the debt will appear on your credit record. Lenders often consider how much debt you are responsible for before deciding whether to grant a loan application.

If you still are considering acting as a co-signer, you may want to negotiate specific terms that would be more favorable for you, such as limiting your responsibility to the principal on the loan. For details, see the FTC’s webpage on “Co-signing a Loan.”

Family Fundamentals is a monthly column on family issues. It is a service of the College of Food, Agricultural, and Environmental Sciences and its outreach and research arms, Ohio State University Extension and the Ohio Agricultural Research and Development Center. Send questions to Family Fundamentals, c/o Martha Filipic, 2021 Coffey Road, Columbus, OH 43210-1044, or filipic.3@osu.edu.

Dear Subscriber: This column was reviewed by Nancy Stehulak, family and consumer sciences educator for Ohio State University Extension.

For a PDF of this column, please click here.