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Most of us have no understanding of the risk we take when we cosign for a loan. We all have a difficult time saying “no,” to our children, relatives, or even friends when asked for help. So when we agree to cosign for a loan, we don’t contemplate the problems that can arise. We should. Obviously we are being asked for help because the person cannot qualify for a loan on his or her own. “It is poor judgment to cosign a friend’s note, to become responsible for a neighbor’s debt,” says the Bible (Proverbs 17:18 ). How true that is. If the person for whom you cosigned a loan becomes delinquent in or stops making payments, you are the one the creditor will come after for repayment of the loan. Also be aware that your credit report will reflect the loan that you cosigned and could show you over-extended in your debts should you apply for future credit. When you cosign for a loan, you are required to complete a loan application and qualify for the loan as if you were the primary borrower. Ask yourself, “If the loan is approved and my co-borrower defaults can I pay the loan back?” Sadly, many times I have seen credit reports ruined because individuals cosigned for loans and the original borrower defaults. Most of the time the person who has cosigned for the loan is not notified of any problems until the situation is out of control and her or his credit is ruined. The best way to avoid a problem if you cosign for a loan is to have the monthly statements sent directly to you. By reviewing the statements monthly, you can see-if payments are being made. You also can collect the payment from your cosigner and mail it yourself. That way you know the payment is being made.
DAN’S STORY Dan and his wife want to refinance their home. When they completed their loan application a credit report was run. Dan’s credit report had several late payments on an automobile account. At first he couldn’t remember what account that was, then realized that it was a loan he had cosigned for his son. His son had run into some financial problems and made the payments late on several occasions. He hoped his father wouldn’t find out, but the secret came out on the credit report. I instructed Dan to write a letter to the lender he was trying to get the new loan from, explaining the situation. The lender requested copies of 12 months of his son’s cancelled checks for the car payments. With the letter and copies of the cancelled checks, Dan was able to refinance his home. Dan contacted the loan company who financed the car and instructed the company to send all the monthly statements to his address. By doing this, he was able to monitor that the payments were being made on time and protect his credit. INSURANCE LIABILITY Q. My husband and I cosigned for an automobile loan for our daughter. If she gets in an accident, can the other party come after us for damages? The first thing to do is check with your insurance agent. If your daughter was involved in an automobile accident, there is a strong probability that you could be involved in a lawsuit if your daughter’s insurance policy didn’t cover the costs of the accident. If the other party discovered your name on the registration or loan documents, your name may be added to the lawsuit to improve their chances of recovering their losses. If your daughter still lives at home or is at college and her insurance is under your automobile policy, you and your husband definitely would be liable. If your daughter lives in a separate household and has her own insurance policy in her name, you probably would not be liable for any damages. REPOSSESSED CAR Q. I cosigned on a car loan for my son. He didn’t make the payments and the car was repossessed. My credit has been ruined. What can I do to improve my credit report? Anytime you cosign for a loan you are taking a huge risk. The best thing that you could do is get a copy of your credit reports from the three major credit reporting agencies. If the repossession is listed on the credit reports, send a letter to the creditor who repossessed the car and tell it your side of the story. The creditor may want to make an agreement for you to repay any losses that it had when it sold the car. Ask the creditor to remove your name from the loan and any future liability, as well as remove the repossession from your credit report. If the creditor agrees, get the agreement in writing before making any payments. Wait four weeks and request another copy of your credit reports. If the loan company has not removed or corrected the entry, send each of the credit reporting agencies a copy of the agreement and proof of your payment. If this does not resolve your reporting problem, you can add a 100-word statement to your credit report describing your side of the story. |