What are my obligations if I co-sign a loan for another person?

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What are my obligations if I co-sign a loan for another person?

By: LawInfo

Published: 01/2009

What should you do if your twenty-something son asks you to co-sign his car loan? While you love your son, you’re not sure if he will be able to make the loan payments. What happens if you co-sign the loan, but your son doesn’t make the payments? Will you have to make the payments for your son?

These all too common questions that parents and grandparents face when their sons, granddaughters, and/or random relatives who are down on their luck come to them to co-sign loans, whether it be for a car, an engagement ring, or just some quick cash. Before you agree to co-sign another person’s loan, however, you need to be aware of your rights and responsibilities for that loan.

The bottom line is that if your son doesn’t make the loan payments as agreed, then you are responsible for making the payments due on the loan. Can you really afford to make an extra $250.00 car payment each month? If not, then you might think twice before co-signing that car loan.

Does it matter that you weren’t the one who needed the loan, or that you’re not the one driving the car? The short answer is no. You are liable for the loan. In some states, the bank or lender can come after you for the loan payments even without first going after the primary person on the loan. The bank can refer you to a collection agency, report you to the credit bureau, sue you, and have your wages garnished, just as if you had originally taken out the loan yourself. Plus, if you pledge your property, such as real estate, a car, or furniture in order to secure the loan, you could lose that property if the loan payments are not made as ordered.

Keep in mind that if your son requires a co-signer on his or her loan, it is because the bank won’t lend him money alone because it is too risky. If the bank won’t risk allowing your son to take out a loan, should you really risk trusting your son to pay the loan that you co-sign for him?

But what if you really want to help your son get back on his feet by co-signing a car loan for him? If you do decide to co-sign his loan, make sure that you take some basic steps to protect yourself. For instance, get a copy of all of the paperwork that you and your son sign so that you are clear on your rights and responsibilities under the loan, as well as the consequences if the payments are not made. Ask the bank to guarantee, in writing, that you will receive notice if your son misses a payment. This will keep you informed about the status of the loan, and help you deal with problems as quickly as possible. Also, check your state laws, which may provide you with additional rights and/or protections as a co-signer of a loan.

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