Co-Signer, Beware
7/8/2013 2:22:18 PM

Before you rush to sign the dotted line as a co-signer, however, it’s important to understand the risk involved, according to John W. Fusilier, CEO of First National Bank DeRidder.

"Co-signers can be caught off-guard if they haven’t fully educated themselves on what they’re signing up for,” Fusilier said. "And there are few things that are more frustrated than being hit with a substantial financial obligation that you weren’t expecting.”

Co-signers are not only vouching for the borrower, Fusilier explained. They’re also promising to step up to the plate if the borrower doesn’t follow through on payments. Simply put: If the borrower doesn’t pay, the co-signer will.

"Signing that contract is more than just a character reference,” he said. "In addition to agreeing to pay outstanding debts, you’re also tying up your own credit. It plays against your personal score by being considered a financial obligation.”

Many borrowers are responsible account holders, but even the most responsible can fall onto hard times—loss of a job being the most common.

There are things co-signers can do to try and protect themselves as much as possible, while still allowing them to help the borrower secure the loan, Fusilier said:

· Try to secure the loan through a bank, rather than a finance company. Banks typically offer much more desirable terms. The Federal Trade Commission reports that three out of four co-signed loans with finance companies wind up being paid by the co-signer.

· Understand how co-signing the loan will affect your credit standing. If you co-sign on a car, for example, and that car is repossessed, it will reflect on your credit report—not just the primary borrower’s. Being a co-signer may also mean that you won’t have free space to secure your own credit. Discuss this with your personal banker.

· Also discuss possible ways you can relinquish liability. For example, some loan terms allow you to limit your responsibility to the loan itself, rather than late charges or collection fees.

· Once the loan has been consistently paid by the primary borrower, ask your personal banker if you can be removed from the note.

Posted by: Erin Kelly | Submit comment | Tell a friend

Categories: Finances

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