Consider risks before cosigning on loan, mortgage

Beware when cosigning a loan or mortgage.

To the cosigner, it is a dangerous and risky agreement where he must accept total liability for an unpaid loan. Recent studies show that when cosigning is required, three out of four cosigners are required to repay the loan.

Therefore, it is essential that you understand the risks and dangers of cosigning and be able to manage this responsibility from the time of the signing until the final repayment of the loan.

Cosigning is a wolf in sheep's clothing. Once you cosign a loan, you become 100 percent liable for the entire loan, which means that if anything is owed to the lender which has not been paid by the borrower (principal, fees, interest), you must pay it.

The cosigner is really a co-borrower with all the responsibilities involved in borrowing, but instead of receiving the loan, he receives nothing. And even if the primary borrower doesn't default on the loan, the cosigner carries the agreement on his credit just as if he were the primary borrower. This makes it more difficult to get another loan.

Cosigning can sting even if the borrower fulfills his obligations. When a borrower defaults on a loan, the cosigner is responsible for the borrower's payments and any other charges. If the cosigner is unable to meet the requirements now imposed upon him, his credit is severely damaged.

If you cosign for someone, it is important that you manage your responsibility as cosigner correctly. Ask for copies of the loan contract along with any other important papers. Sometimes you must get these from the borrower, because the lender is not required to give them.

Also ask the lender to notify you if the borrower misses a payment, so that you have time to deal with the problem and make back payments.

If the borrower is buying property with the loan, make sure you are on the title as co-owner. If the borrower refuses to put you on the title, refuse to cosign.

Cosigning includes liability and risk. Here are some tips to remember when cosigning:

1. Cosign for family members only, except in rare circumstances, and talk to your local banker before cosigning.

2. Don't be pressured into cosigning. It is a big commitment and should be made deliberately and slowly.

3. Make sure you can afford to pay off the debt if the borrower defaults. Ask the lender to figure out how much is the maximum you will be expected to pay if this happens.

4. Negotiate beneficial terms at the signing. Ask for a. important papers, including the loan contract, b. notification from the lender if the borrower misses a payment, and c. your name as co-owner if any property is involved.

5. Consider that your liability alone may keep you from getting other credit you may want or need. Make sure you understand what you are getting into and make sure you manage your new liability effectively and in a businesslike manner.

(The preceding article was provided by the Missouri Independent Bankers Association.)