Will you be my cosigner? Part 2

Understanding the obligations of a cosigner.

In Part 1 of this two part series, the risks of cosigning for a loan as well as federal legislation protection was explained. Part 2 will cover the precautions one should consider before cosigning and review laws in the State of Michigan that protect cosigners. 

The Michigan State Attorney General divulges these precautions for potential cosigners:

  • Are you certain that you can repay the loan? You must repay the loan in in full if the borrower defaults, and does not pay.
  • Your ability to qualify for credit, in the future, may be impacted by cosigning for someone. The cosigned debt becomes your debt. Your credit file will reflect this new debt and will be used by lenders to calculate your total debt ratio. If it appears that you are overextended (have too much debt) or are approaching that point, you may be deemed a credit risk.
  • Be cautious about securing a loan with your property. You are in danger of losing the property if the borrower defaults and you cannot make the payments.
  • Be aware of the amount that you owe. The lender may calculate the specific amount if asked but is not mandated to perform this service.
  • Sharpen your negotiation skills. Specific terms of the obligation may be negotiated. For example, you might want to have your liability limited to paying the principle balance on the loan, not late charges, court costs, or attorney’s fees. Ask the lender to include a statement in the contract similar to:

“The cosigner will be responsible only for the principal balance on this loan at time of default”

  • Any requests that you make to the lender should be in writing. Ask the lender to respond to your requests in writing. This will provide documentation for future reference.
  • Ask the borrower to notify you if a payment is missed. Also, ask the lender to agree, in writing, to notify you if the borrower misses a pay­ment. This will give you an opportunity to handle the problem or make the missed payments without having to repay the whole amount immediately.   
  • Request copies of all important papers. This includes but is not limited to the loan contract, the Truth-in-Lending Disclosure Statement, and any warranties if you are cosigning for a purchase. This paperwork is needed if there is a dispute between the borrower and the lender. There is no requirement on the part of the lender to provide these documents to you. You may have to get copies from the borrower. 

Michigan State University educators urge you to be aware of the issues when cosigning for a loan. Potential cosigners should urge borrowers to explore all lending options before seeking a cosigner. Assess your financial health and visit Michigan State University Extension.  In addition, Michigan State University offers money management and homeownership classes. For more information about classes offered in your area visit MI Money Health

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