| 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.
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.
| Here are three rules you should
use to govern your decision to co-sign for a loan: |
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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."
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