Your friend, cousin, brother-in-law … some family member … asked if you could cosign on a loan for them. And despite the risks, you agreed since all meet the qualifications for the ONLY time you should cosign for someone and of course … you’re a nice person.
So now it’s getting to the time to sign on the dotted line, and you’re getting a little skittish.
It’s not that you don’t trust your family, but you want to be sure you’re protected just in case things go sideways and you’re left paying the car loan on your cousin’s Mercedes.
So here’s the list of 8 things to do to protect yourself when you cosign for a loan.
1. Get all the loan documentation and review it
Information is key here.
You need to know the loan provider, the account number, how much is being borrowed, all the terms (aka the fine print of the loan – deadlines, fees, early payment gotchas etc.).
The last thing you want is to be in the dark about the loan, only find out what’s happening when the collection agencies start calling you.
Gather all the data and keep it safe with your personal financial documents.
After all, you’re financially tied now.
And being able to call the provider and check in on your own saves you asking the awkward ‘how’s the loan repayment going?’ question at family gatherings.
2. Consider being the primary
I know it sounds messed up.
You’re not the one who needs the loan so why should you put yourself down as the primary person responsible for paying back the loan.
But I hate to break it to you, that’s basically what you agreed to.
So since you’re responsible for the loan anyway, you might as well be in control of the debt. That way you have full knowledge of everything pertaining to the debt.
You will have account access, can monitor the account, have your family member pay you the money each month, and then you make the payments to the account.
You’ll be certain that payments are being made on a regular basis and if your family member stops giving you the payments, then you can step in to make them before it damages your credit.
3. Collateralize the deal and be on the title
This means that there should be something of substance (a car, house, jewelry, etc.) some asset that can be liquidated for cash if the borrower cannot or chooses not to repay the loan.
Makes sense right? But this part is important.
You want to make sure you are on the title of whatever asset is being used as collateral. For example: if you are cosigning on a car for your brother, then you want to make sure you are also listed on the title of the car. So in the event that your brother can’t or won’t make the payments, YOU (as a named title holder) can sell the car, trade it in, voluntarily surrender the car and get out of the loan.
If you aren’t a titleholder, then you are stuck footing the bill, while your brother drives off into the sunset with HIS car.
Even if the loan isn’t for an asset, try and get something in exchange that you can use as collateral to cover the loan.
4. Insure the asset, so if anything happens you are in the clear
Whatever the loan is for, you need to make sure the asset is appropriately covered.
Whether you need home insurance for your house, adequate car insurance, renters insurance for the furniture bought on credit, or life insurance for your college student (sorry to go a little dark there, but getting private student loans discharged due to death is still tricky).
You don’t want to be left paying the bill for a car that was totaled in an accident, or a house that burned down but wasn’t insured. So make sure the borrower has up to date and appropriate insurance and just like in step number 1 – get the details and keep track of them.
5. Put the asset in a trust where you are the trustee and in control of the asset.
If you or the borrower aren’t up for you being on the title directly, you can always try this option. Putting the asset in a trust for the benefit of the borrower where you are the trustee means that the borrower has access to the asset to use it as they see fit within the guidelines of what is allowed by you.
When you are listed as the trustee of the trust it means that you dictate what, how much of the asset the borrower can have, and what they can do with it. If the borrower refuses to make payments, you have full access to the asset and can liquidate as needed.
6. Create a contract so they know its official.
Borrowers think that as a cosigner you are just bystanders. That your involvement ends as soon as the ink is dried and the ‘real contract’ is between them and the loan provider. But that’s not true.
When you cosign for someone you really entering into a legal contract between you and the loan provider since they are only lending to the borrower because you guarantee they’ll get paid.
You can have a contract written up for you and the borrower to remind your borrower than you’re in this deal too, and need just as much if not more clarity of the dealings.
It doesn’t have to be fancy. Just a couple sentence that they agree to pay ‘x’ amount in a timely manner, provide details for the loan so you can keep track, alerting you promptly of any changes in their situation that would prevent them from paying, and the process (‘consequences’) if they can’t pay.
7. Set up alerts so you know when the payments are being paid.
If you have access to the account – whether having your own account access or being copied on emails – then you can have alerts set up to let you know the payment has been made.
Talk to your borrower, and let them know that you would like to be alerted when payments are made. That way if there is any trouble you can help to get it resolved quickly or step in to assist as needed.
Again, you’re in this together. This is a partnership where you are taking 90% of the risk so don’t be shy about what you need.
8. Have an exit strategy and be prepared for the worst-case scenario
No matter how hard or how well you plan, sometimes things just don’t work out.
People change. They get divorced. They are in a hard situation where all the choices suck. Or they turn out to be a totally turd and the black sheep of the family.
The point is that things happen and you want to have a backup plan for what to do if the sh*t hits the fan.
So talk it over with your family member and be open about what you’ll both need to do if life happens and kicks you in the face.
So What Now?
The whole thing sounds like a huge hassle right?
You barely want to keep track of your own financial documents and now you have to track someone else’s and make sure they are doing the right things.
But buyer beware.
This is what it takes to protect yourself when you cosign.
You don’t have to be a jerk about it, or demand they follow your rules but being open and honest about your concerns and what it would take to have you feel comfortable in this agreement can go miles.
At the end of the day, you need to be in control of the financial dealings with this loan just as much as you would your own activities.
It’s also why 95% of the time, the answer to the request to be a cosigner is no. Because you and the borrower are intertwined until the loan has been paid off and you the borrower may have different ways of handling finances than you do.