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Cosigning A Loan? Know the Risks!
The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern. Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General.
Cosigning a loan?
Know the risks!
When you cosign a loan for someone, you are helping that person obtain a loan that he or she would not be able to get on their own. You are also taking a risk that a professional lender will not take. The lender would not be asking for a cosigner if the borrower met the lender's criteria for making a loan.
Before taking this risk and cosigning a loan, be sure you understand the potential consequences:
FEDERAL AND STATE LAW PROTECTIONS FOR COSIGNERS
Because of the risks involved
with cosigning a loan, Federal law requires lenders to give potential cosigners
the following notice:
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 may 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 increase this amount.
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 may become a part of your credit
This notice is not the contract that makes you
liable for the debt.
Further, Michigan law offers protection to a cosigner in the event the borrower defaults on the loan. Under State law, before the lender may report adverse information about the cosigner to a credit reporting agency or take any collection action against the cosigner, the lender must do both of the following:
(a) Send the cosigner, by first class mail, a notice advising that the primary borrower has become delinquent or defaulted on the obligation and the cosigner is responsible for payment of the obligation.
(b) Allow the cosigner at least 30 days from the date that the notice was sent to respond to the notice by either paying the amount due, or making other acceptable payment arrangements with the lender. If payment or payment arrangements are made, the lender may not report adverse information about the cosigner to a credit reporting agency.
PRECAUTIONS TO TAKE BEFORE YOU COSIGN
Despite the risks, there may be times you decide to cosign. Here are a few things to consider before you cosign:
Consumers may contact the Attorney General's Consumer Protection Division at:
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