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Before you cosign on the dotted line ... protect credit
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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.

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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.

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.

Helpful tips
Here are three rules you should use to govern your decision to co-sign for a loan:
The three 'knows'
1. Know the person you are helping.
2. Know your capability and responsibility.
3. Know how to operate like a lending institution.

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."

 
 
Next: "You may choose not to sign."
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