Wednesday, June 1, 2011

The risks of co-signing loans

I mentioned in my last post that cosigning loans is risky. How risky? According to the FTC, depending on the type of the loan, as many as three out of four primary borrowers default on their obligations, leaving the cosigner to pay. ...

If you think that they really need the money, and that you're not just helping someone dig themselves even deeper into financial irresponsibility, then my advice is to just give them the money.

Give them the money? I can't possibly afford to do that!

Well, my friend, given the default rates of primary borrowers, that is what you're doing when you cosign--with the additional cost of origination fees, interest payments, late fees, collection fees, a black mark on your credit report, and probably, a destroyed relationship.

When the primary borrower defaults, you're on the hook, not just for the loan, but for any late charges or collection fees that may have accrued. If it's a car, the repo man will sell it for cheap at auction, and then sue you for the difference--there are no "non-recourse" auto loans. Meanwhile, your credit will be trashed. Contracts don't always include notice requirements for the secondary borrower, so you may not even find out about late payments until it's in collections.
--Megan McArdle, Atlantic Monthly, on knowing the price of co-signing. See also Proverbs on co-signing

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