4 Things to think about before co-signing a loan

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PHOENIX – With the increase in foreclosures and short sales in the past couple of years, many people are finding that their credit is so damaged that it’s difficult, if not impossible, to obtain a loan to buy a car or even get a new credit card without a little help.

That help would be in the form of a co-signer.

If you are thinking about co-signing a loan for a friend or loved one, there are some things you need to take into consideration. The most important thing to realize is that once you sign on the dotted line, you are on the hook for that money, and as many three out of four co-signers are eventually asked to repay the loan themselves.

Mike Sullivan, the director of education for Take Charge America, a non-profit credit-counseling agency based in Phoenix, says co-signing a loan is a serious decision, one he’s had to make himself.

“When somebody asks, it’s hard to say no,” Sullivan said. “It’s hard for a lot of us.”

Sullivan said there are only two reasons for needing a co-signer. First, the person trying to get the loan has no credit, which might be the case with a young person. Second, the person has bad credit.

The no credit/bad credit situation is something you need to take into consideration because once you co-sign a loan, it’s a done deal and there is no going back.

Sullivan said he often hears from people trying, for whatever reason, to get their names off a loan they have co-signed. It’s simply not possible.

“Once you’ve co-signed, you’re responsible until that loan is repaid,” Sullivan explained.

Not only are you responsible for the co-signed loan, that loan could mean credit setbacks for you. Because that co-signed loan is considered one of your credit obligations, it could prevent you from getting credit of your own. It’s also going to affect your credit score.

When you co-sign a loan, you’re not just responsible for the amount borrowed, you could also be called up to pay any fees associated with the loan. Those fees could be assessed for late payments, missed payments and defaults, and could also include collection costs and legal fees.

The last thing you need to know before co-sign a loan is that the lender can garnish your wages. You could even lose your property if the loan goes into default.

“You are fully responsible for this loan if you co-sign for it,” Sullivan said. “If they seek a judgment against you as the co-signer, and they might, they can go ahead and garnish your wages or put a lien on your house or property. They can do anything [that’s legal] to collect that loan from you as the co-signer. You can’t walk away from it.”

Sullivan said he himself once co-signed a loan for one of his children.

“I decided to take a chance,” he said. “I took a chance only to the extent that I knew I could lose that amount and still survive.

“That’s another rule. If you’re going to do it, make sure you can lose that amount.”