You might want to do some serious thinking before you take that step. Don't underestimate the possible costs of scribbling your signature on a legal document for the credit impaired.
November 9, 2006 (Press Release) --
Thinking about co-signing a loan for a friend or family member?
You might want to do some serious thinking before you take that step. Don't underestimate the possible costs of scribbling your signature on a legal document for the credit impaired.
Co-signing has been known to destroy relationships and wreak financial havoc. In fact, most financial experts, such as credit counselors and financial planners, will tell you that co-signing is a bad idea.
But, if you insist, here are some tips that can help you wisely safeguard your credit if you choose to co-sign for a loan.
1.Proceed with caution
Co-signing means you are telling the lender that you are equally responsible for the loan, and if the borrower fails to pay, YOU are guaranteeing that payment. Think about that. You're not just helping someone get a loan, you're promising to pay the debt yourself if the borrower does not.
If the lender decides to sue and wins, it can go after your wages and your property.
That's important. Studies have shown that as many as three out of four co-signers ultimately end up making payments on the loan.
Credit counseling organizations are seeing the effects.
"Twenty percent of consumers that have gone into the Association of Independent Consumer Credit Counseling Agencies' debt management plans have had issues with co-signing," says David Jones, president of AICCCA.
Bankruptcy attorneys are seeing a fair amount of cases, too. Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, says that cases are frequently seen with parents who co-sign on a car loan for a child with bad credit.
Marc Stern, a consumer bankruptcy attorney in Seattle, says 20 percent to 30 percent of his cases involve consumers who have co-signed for a loan.
"They were in bad shape anyway, but this put them over," he says. "The vast majority are girlfriends signing for a truck or stereo, mothers signing for their son's car. It's mostly women who are co-signing."
Carla Jackson of Virginia Beach, Va., recently was discharged from a bankruptcy mostly caused by a car loan she co-signed for her husband.
"My ex-husband had his vehicle repossessed due to missing three payments, and because I co-signed while we were married, they came after me. Therefore I had to file bankruptcy because I couldn't afford to make the payments," Jackson says.
She says she was divorced for three years at the time the car was repossessed and hadn't a clue that her ex-husband had quit his job and stopped making payments. Jackson says she had excellent credit when she moved out on her own. But when she went over her debts with an attorney, she realized that she could not afford to pay $500 for his vehicle and her mortgage, car payment, credit cards and utilities.
Some financial experts say co-signing can be appropriate under the right circumstances. Jessica Cecere, president of Consumer Credit Counseling Service of Palm Beach County/Treasure Coast of Florida Inc., doesn't promote co-signing, but says it can be an opportunity for a parent to teach a child with no credit history financial responsibility by providing oversight along the way.
Mark Wolfe co-signed on his sister's car loan because she had no credit history. His sister had graduated from a nursing school in Canada and accepted a job in Georgia, a place where she had no family or friends.
He says despite being an RN at a local hospital, the banks wouldn't give her a loan until she had proven income for a couple months.
"It is hard to prove income for a few months when the commute to work is over 20 miles and you have no car," says Wolfe.
2.The three 'knows'
Lack of awareness and lack of information has left some co-signers primarily responsible for the loan and/or with a tarnished credit record.
(1)Know the person you are helping.
Believe it or not, some people barely know the borrower, especially the person's financial habits.
Experts advise, if a friend or relative approaches you about co-signing a loan, it is important to consider the person's maturity level and his or her ability to be responsible.
(2) Know your capability and responsibility.
"Never co-sign on a loan that you don't intend to pay yourself," says Jason Ricketts, who says he ended up paying the remainder of his mother's auto loan.
"There is a very good reason that the bank does not want to assume the risk," he says.
When discussing the loan transaction with the lender, be sure to get a copy of the "Credit Practices Rule."
The rule requires creditors to give a notice that explains your responsibilities as a co-signer.
The notice must say:
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't 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 might 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 increases 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 might become a part of your credit record.
According to the Federal Depository Insurance Corp., you can go to the state attorney general's office, consumer protection office or banking regulator's office to find out if the state has laws governing co-signing for a loan.
Also, prepare for unanticipated events, such as a lost job, an illness or an accident.
Bob Kranitz ended up experiencing most of these events when he co-signed on a car loan for his friend's son who didn't have any credit history. Neither he nor the young man had a clue of the financial trouble that lay ahead.
"Unfortunately, he was laid off and began having a problem meeting payments," Kranitz says. "He eventually got another job. However, he was injured on that job and applied for workers' compensation."
Kranitz says it took one year for workers' compensation to kick in and for the young man to receive some money because the company kept appealing. The truck was repossessed. Kranitz says he later received a letter from the bank letting him know that he had to make a couple of months' worth of payments, plus accompanying fees.
"I had a choice: Come up with more than $2,000 to get the truck back or have the bank sell it and still owe the balance on the truck."
Krantiz chose to get the truck back, and says he sympathizes with the young man's situation, but could use the "$4,000 or so" he "lent."
(3) Know how to operate like a lending institution.
Get a copy of the borrower's credit report and credit score.
Find out if the borrower is paying his or her current bills on time by asking for current financial statements.
Make sure he or she has a steady job, and ask to see his or her W-2s.
Find out how he or she plans to pay the bills over the term of the loan.
Read the contract and understand the terms. Jones advises that you may want to have an attorney look over the contract so you know your liability. He also says doing this takes away from the "impulse buy."
Keep a copy of the contract and truth and lending disclosures.
Find out the worst-case scenario. Ask the lender to calculate exactly the amount you would owe if you had to pay for the loan.
Keep a copy of the person's personal information, such as his or her Social Security number and date of birth.
Make sure you keep his or her current address and work information up to date.
Ask the lender to put in writing immediate notification if the borrower misses a payment and that you are to receive a copy of the monthly statements.
Check in with the co-signer from time to time. Lynne Strang, spokeswoman for the American Financial Services Association, says, this way if you believe a problem is imminent you can work with the borrower to find out about other alternatives, such as refinancing, sale of the item, or some actions that can be taken by the borrower, such as finding a second job.
Once you co-sign, you can't simply walk away from the loan. That's why the most critical time is the moment before you put the pen to the paper. This is the point where you may be able to negotiate specific terms of your obligation with the lender.
The Federal Trade Commission provides this example, "You may want to limit your liability to the principal on the loan and not include late charges, court costs or attorneys' fees. In this case, ask the lender to include a statement in the contract similar to: 'the co-signer will be responsible only for the principal balance on this loan at the time of default.'"
How to say 'no'
You may choose not to sign, but rather than leave the person stung by your response, provide some alternatives. Credit counselors suggest telling the borrower that he or she can develop his or her credit by staying with one bank, getting a secured credit card, taking out a small loan or getting a gas card. Make sure to stress that he or she should keep the limits low and make timely payments.
Author: Brigitte Yuille
Source: http://biz.yahoo.com/
You might want to do some serious thinking before you take that step. Don't underestimate the possible costs of scribbling your signature on a legal document for the credit impaired.
Co-signing has been known to destroy relationships and wreak financial havoc. In fact, most financial experts, such as credit counselors and financial planners, will tell you that co-signing is a bad idea.
But, if you insist, here are some tips that can help you wisely safeguard your credit if you choose to co-sign for a loan.
1.Proceed with caution
Co-signing means you are telling the lender that you are equally responsible for the loan, and if the borrower fails to pay, YOU are guaranteeing that payment. Think about that. You're not just helping someone get a loan, you're promising to pay the debt yourself if the borrower does not.
If the lender decides to sue and wins, it can go after your wages and your property.
That's important. Studies have shown that as many as three out of four co-signers ultimately end up making payments on the loan.
Credit counseling organizations are seeing the effects.
"Twenty percent of consumers that have gone into the Association of Independent Consumer Credit Counseling Agencies' debt management plans have had issues with co-signing," says David Jones, president of AICCCA.
Bankruptcy attorneys are seeing a fair amount of cases, too. Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, says that cases are frequently seen with parents who co-sign on a car loan for a child with bad credit.
Marc Stern, a consumer bankruptcy attorney in Seattle, says 20 percent to 30 percent of his cases involve consumers who have co-signed for a loan.
"They were in bad shape anyway, but this put them over," he says. "The vast majority are girlfriends signing for a truck or stereo, mothers signing for their son's car. It's mostly women who are co-signing."
Carla Jackson of Virginia Beach, Va., recently was discharged from a bankruptcy mostly caused by a car loan she co-signed for her husband.
"My ex-husband had his vehicle repossessed due to missing three payments, and because I co-signed while we were married, they came after me. Therefore I had to file bankruptcy because I couldn't afford to make the payments," Jackson says.
She says she was divorced for three years at the time the car was repossessed and hadn't a clue that her ex-husband had quit his job and stopped making payments. Jackson says she had excellent credit when she moved out on her own. But when she went over her debts with an attorney, she realized that she could not afford to pay $500 for his vehicle and her mortgage, car payment, credit cards and utilities.
Some financial experts say co-signing can be appropriate under the right circumstances. Jessica Cecere, president of Consumer Credit Counseling Service of Palm Beach County/Treasure Coast of Florida Inc., doesn't promote co-signing, but says it can be an opportunity for a parent to teach a child with no credit history financial responsibility by providing oversight along the way.
Mark Wolfe co-signed on his sister's car loan because she had no credit history. His sister had graduated from a nursing school in Canada and accepted a job in Georgia, a place where she had no family or friends.
He says despite being an RN at a local hospital, the banks wouldn't give her a loan until she had proven income for a couple months.
"It is hard to prove income for a few months when the commute to work is over 20 miles and you have no car," says Wolfe.
2.The three 'knows'
Lack of awareness and lack of information has left some co-signers primarily responsible for the loan and/or with a tarnished credit record.
(1)Know the person you are helping.
Believe it or not, some people barely know the borrower, especially the person's financial habits.
Experts advise, if a friend or relative approaches you about co-signing a loan, it is important to consider the person's maturity level and his or her ability to be responsible.
(2) Know your capability and responsibility.
"Never co-sign on a loan that you don't intend to pay yourself," says Jason Ricketts, who says he ended up paying the remainder of his mother's auto loan.
"There is a very good reason that the bank does not want to assume the risk," he says.
When discussing the loan transaction with the lender, be sure to get a copy of the "Credit Practices Rule."
The rule requires creditors to give a notice that explains your responsibilities as a co-signer.
The notice must say:
You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't 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 might 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 increases 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 might become a part of your credit record.
According to the Federal Depository Insurance Corp., you can go to the state attorney general's office, consumer protection office or banking regulator's office to find out if the state has laws governing co-signing for a loan.
Also, prepare for unanticipated events, such as a lost job, an illness or an accident.
Bob Kranitz ended up experiencing most of these events when he co-signed on a car loan for his friend's son who didn't have any credit history. Neither he nor the young man had a clue of the financial trouble that lay ahead.
"Unfortunately, he was laid off and began having a problem meeting payments," Kranitz says. "He eventually got another job. However, he was injured on that job and applied for workers' compensation."
Kranitz says it took one year for workers' compensation to kick in and for the young man to receive some money because the company kept appealing. The truck was repossessed. Kranitz says he later received a letter from the bank letting him know that he had to make a couple of months' worth of payments, plus accompanying fees.
"I had a choice: Come up with more than $2,000 to get the truck back or have the bank sell it and still owe the balance on the truck."
Krantiz chose to get the truck back, and says he sympathizes with the young man's situation, but could use the "$4,000 or so" he "lent."
(3) Know how to operate like a lending institution.
Get a copy of the borrower's credit report and credit score.
Find out if the borrower is paying his or her current bills on time by asking for current financial statements.
Make sure he or she has a steady job, and ask to see his or her W-2s.
Find out how he or she plans to pay the bills over the term of the loan.
Read the contract and understand the terms. Jones advises that you may want to have an attorney look over the contract so you know your liability. He also says doing this takes away from the "impulse buy."
Keep a copy of the contract and truth and lending disclosures.
Find out the worst-case scenario. Ask the lender to calculate exactly the amount you would owe if you had to pay for the loan.
Keep a copy of the person's personal information, such as his or her Social Security number and date of birth.
Make sure you keep his or her current address and work information up to date.
Ask the lender to put in writing immediate notification if the borrower misses a payment and that you are to receive a copy of the monthly statements.
Check in with the co-signer from time to time. Lynne Strang, spokeswoman for the American Financial Services Association, says, this way if you believe a problem is imminent you can work with the borrower to find out about other alternatives, such as refinancing, sale of the item, or some actions that can be taken by the borrower, such as finding a second job.
Once you co-sign, you can't simply walk away from the loan. That's why the most critical time is the moment before you put the pen to the paper. This is the point where you may be able to negotiate specific terms of your obligation with the lender.
The Federal Trade Commission provides this example, "You may want to limit your liability to the principal on the loan and not include late charges, court costs or attorneys' fees. In this case, ask the lender to include a statement in the contract similar to: 'the co-signer will be responsible only for the principal balance on this loan at the time of default.'"
How to say 'no'
You may choose not to sign, but rather than leave the person stung by your response, provide some alternatives. Credit counselors suggest telling the borrower that he or she can develop his or her credit by staying with one bank, getting a secured credit card, taking out a small loan or getting a gas card. Make sure to stress that he or she should keep the limits low and make timely payments.
Author: Brigitte Yuille
Source: http://biz.yahoo.com/
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