Why obligate one customer
to pay a bill when you
can have two? With more
and more poor credit
ratings on the books,
creditors are turning
more towards cosigned
debts as a method of
repayment. A cosigned
loan obligates two people
to repay a loan instead
of one. Depending upon
your perspective, the
loan can be an extraordinary
benefit or a major liability.
For a creditor, another
signatory creates a safety
net when a primary signor
has a shaky financial
history. For the extra
signor, the loan creates
the financial responsibility
of paying the entire
debt.
Consider this illustration:
John Smith wants to
purchase a motor scooter
from Richard for $2,000.
John does not have
the upfront cash to
pay Richard and asks
for a payment plan.
Richard runs a credit
check on John and discovers
John has missed several
payments on previous
car loans. Nervous
about recovering the
entire $2,000, Richard
tells John he will
sell him the scooter
only if John's father,
Bob, signs the contract
as well. Trusting his
son will pay for the
scooter himself, Bob
happily signs the contract.
A few months later,
John moves to Michigan
and takes the scooter
with him. He has not
made any of the payments
on the scooter to Richard.
Richard demands John
make his payments,
but John tells him
he cannot. Richard
then sues Bob for the
entire $2,000. Under
the terms of the contract,
Bob must pay the entire
$2,000. Bob has no
legal defense!
Unfortunately, the
above example happens
all too often. Studies
have shown that for
defaulted cosigned
loans, three out of
four cosignors are
asked to repay the
loan. If you are considering
cosigning or asking
someone to cosign for
you, be aware of the
risks! If you must
cosign, make sure you
can afford to repay
the loan on your own.
Be sure that all parties
receive a copy of the
contract. And, if you
are a cosignor, write
a letter to the lender
asking for a notification
of any future default.
That way, you can prepare
for any default in
advance and will not
be forced to pay the
entire amount right
away.
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