If a friend or relative asks you to co-sign a loan, think carefully before making a decision. There are risks involved with co-signing, but there may be times when it's the right thing to do. Before you pick up that pen, consider these tips:
1. Inform yourself. Federal law requires creditors to provide you with a written notice outlining your obligations. Read it with care. The notice should explain that you are being asked to guarantee the borrower's debt and repay it if he or she cannot.
2. Co-signers often get stuck with the bill. Studies reveal that up to three-quarters of all co-signers are asked to repay loans that go into default. If your friend or relative misses a payment, the lender may be able to collect from you without first pursuing the borrower.
3. Recognize your obligation. Realize that you're accepting a risk a professional lender was not willing to take. Be sure you can afford to pay back the debt if necessary, and reflect on whether you truly want the responsibility.
4. Count all the costs. In addition to the total loan amount, you may be hit with additional late fees and collection costs.
5. Understand bill collectors' tactics. If the debt goes unpaid, the creditor may use a variety of collection methods, including suing you, garnisheeing your wages and repossessing your property.
6. Think worst-case scenario. If the borrower defaults, the unpaid loan will become part of your credit record. Even if the creditor doesn't come after you, your liability may prevent you from securing other credit. And before you pledge property such as a car or furniture to secure the loan, reflect on the possibility that you could lose these items.
7. Know when it's a good move. Despite the risks, there may be times when you want to co-sign. A close friend may need your help, or your child may need his or her first loan.
8. Negotiate with the lender. If you want to limit your liability to the principal on the loan and not be held responsible for late charges, court costs or attorneys' fees, ask the lender to include a statement in the contract saying so.
9. Cover yourself. Make arrangements _ in writing _ to have the lender notify you if the borrower misses a payment. Also ask the lender to calculate the total amount you could end up owing.
10. Keep good records. Get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement and warranties if you're co-signing for a purchase. You may need them if a dispute ever erupts between the borrower and the creditor or seller.
_ Compiled by Laura T. Coffey.
Sources: Federal Trade Commission (http://www.ftc.gov) and Florida Attorney General's Office (http://legal.firn.edu/)