I discussed the perils of co-signing a few weeks ago, after I heard a woman telling the story to a friend about getting collector calls on a car loan she co-signed for her granddaughter.
The detail that surprised me was that the woman didn’t seem to realize how much this would affect HER.
But I wasn’t about to comment on that detail uninvited at a social gathering.
This week, I came across an article from the Columbus Dispatch that talked about co-signing. While the article had the usual warnings against such a practice, the reporter went into much more detail than what is usually discussed about what can and does happen.
Here’s one snippet:
“I generally don’t ever recommend someone co-signing, no matter who it is,” said Eric Bishoff, a certified financial planner with the Bishoff Financial Group in Worthington, who knows a woman who lost her own home because she co-signed for a relative.
But this snippet really got my attention:
That risk is more than hypothetical. The Federal Trade Commission reports that as many as three out of four co-signers ended up paying the loan.
In one respect, the co-signer might assume even more risk. Some studies suggest that lenders pursue the co-signer first if payments are delinquent, under the assumption that the co-signer is more able to pay.
“A lender could sue both of you or they could choose to sue you if you have better credit,” said Polyana da Costa, senior mortgage analyst for Bankrate.com. “They know you want to protect your credit.”
My reaction was: Wow. Is that FTC statistic for real?
Yes. I went looking for it, and found the reference in an FTC bulletin from summer 2002:
The Federal Trade Commission says that as many as three out of four co-signers are requested to make payments on a loan. “When you’re asked to co-sign, you’re being asked to take a risk that a professional lender won’t take,” explains the FTC. “If the borrower met the (basic lending) criteria, the lender wouldn’t require a co-signer” in the first place. In addition, the borrower may become unemployed or ill and no longer be able to repay the loan.
Unfortunately for the co-signer, the lender often looks to him or her soon after troubles start with a loan. “In many states, if the borrower misses just one payment, the lender can immediately try to collect from the co-signer without first trying to collect from the borrower,” says Robert Patrick, an FDIC attorney.
And what could happen if you, as a co-signer, refuse to make the loan payments? You could get a bad mark on your credit record, and that could make it tougher to get a loan, a job, an insurance policy or something else you might apply for in the future. The lender can sue you and attempt to “garnish” wages (withhold a percentage of your paycheck until the loan is paid). You may be responsible for late fees or legal fees. And, if you offered collateral (such as furniture) as security for the loan, the lender may seize the property and sell it to cover the debt.