Think Twice Before Cosigning a Debt

two-pensA friend or family member wants to buy a car, but they can’t afford to pay cash, and their finance application is going nowhere. Should you cosign a loan or lease to help them seal the deal?

Think carefully before you “sign on the line which is dotted.” Even though your intentions are good, guaranteeing someone else’s debt can lead to big trouble for you, the cosigner.

Understand What You’re Getting Into

By cosigning, you’re making a promise to the lender: “If the borrower doesn’t pay, then I will pay.” Not only that, but the odds are high that you will, in fact, end up paying.

If a guarantor is required, at least one of the following is probably true:

  • The debtor doesn’t have enough income to make the loan payments.
  • The debtor has little or no credit history, so they haven’t proven whether they can repay a debt.
  • The debtor has a poor credit history — in other words, a track record of borrowing money and not paying it back.

Whatever the reason, the creditor thinks there’s a good chance the borrower will default on the debt. While there are exceptions (the subprime mortgage crisis comes to mind), lenders are usually pretty good at predicting whether a loan will be repaid. If the borrower isn’t a good risk, then the creditor wants a cosigner who’s able to pick up the tab.

Going After the Deep Pocket

In most states, including Indiana, the lender can try to collect from a cosigner as soon as the borrower misses a single payment. The creditor’s goal is to get paid with as little effort as possible, so they’re likely to focus their collection efforts on the easier target. Yes, you can seek reimbursement from the borrower if you’re forced to pay up, but will you succeed where the lender failed?

Matt Conrad is an Indianapolis bankruptcy attorney and the founder of Conrad Legal LLC, which helps people in Central Indiana get out of debt with Chapter 7 and Chapter 13.

Posted in Managing Money Tagged with: