Today is the birthday of the man who jacked up my credit. In honor of the lesson he taught me, I am declaring October 9th as National Don’t Cosign Day. (Not sure if I have that power, but whatever.) Coincidentally one of my favorite NPR shows had a segment on the perils of cosigning. I’ll steal a line from one of the guest and share that “you shouldn’t cosign for a pack of gum.”
Cosigning is often an emotional act rather than a financial one. As a former cosigner, the desire to help someone obtain something they want or need is part of being in a caring relationship. As a mother, you want to help your daughter get her first mortgage. As a friend, you want to help your BFF move into a nicer apartment. In my case, the boy said his credit was bad because he had cosigned for his cousin. It pulls on the ol’ heart strings. But you also assume that the person will be extra diligent in making sure that the debt is repaid on time, because it’s not just their credit at stake. They care about you too, right?
Sure they do, but according to the Federal Trade Commission (FTC) three out of four cosigners are asked to pay the loan. Why? Because the issues that impedes the borrower’s ability to solely qualify for the loan in the first place are going to be there whether you cosign or not. They mean well, but if they don’t make enough money, have competing financial priorities, or just aren’t good at managing their money, more than likely they won’t repay the debt on time or at all.
The FTC website states that under federal law, creditors are required to give you a notice that explains your obligations as a cosigner. The notice states:
You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount. The creditor can collect this debt from you without first trying to collect from the borrower.* The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record. This notice is not the contract that makes you liable for the debt.
* Depending on your state, this may not apply. If state law forbids a creditor from collecting from a cosigner without first trying to collect from the primary debtor, this sentence may be crossed out or omitted altogether.
This must be new because I don’t remember seeing that…or maybe I didn’t read it. I think I was blinded by love (and stupidity apparently) and I can’t front, the idea of driving around in a spanking new 535i was exciting. Shame on me, shame on him.
So, take a lesson from me (and the FTC). Before you cosign, consider the following:
- Be sure you can afford to pay the debt. This deserves repeating: be sure you, and you alone, can afford to pay the debt. If you can’t, your creditworthiness can go down the tube and you could be sued for what’s due.
- Even if you’re not asked to repay the debt, the loan shows up on your credit report and affects your debt to income ratio and your FICO score. If you’ve got some credit needs coming up, you may want to think twice about adding another debt.
- Ask the lender to agree, in writing, to notify you if the borrower misses a payment. If only I had done this. It could have save me the shock of hearing from my mortgage broker, “Your BMW loan is more than 90 days past due.” Motherfu….
- Make sure you get copies of all important papers like the loan contract, any disclosures, and warranties. Not that this absolves you of your responsibility as a cosigner, but at least you have all the documentation in case you need it.
Thankfully, the BMW account was the only blip on my credit and the damage to my score was short lived. But the damage to my bank account took a while to correct. After all was said and done, I paid a ridiculous amount of money to satisfy someone else’s debt. Time heals all wounds so I’m over it, but it still baffles my mind at times.
So in honor of National Don’t Cosign Day, think of me and pay a bill on time.