It is natural to want to help a loved one who is trying to get ahead in life and in need of a loan. As such, when they come to you with pen in hand, as it were, and a request to cosign on a loan for them, your thoughts on the proposal might vacillate back and forth as you weigh your desire to help them achieve their dreams with the financial responsibility that that help might entail.
After all, it’s not like you’re loaning them $50 with a wink and a nod and a reasonable expectation of repayment; you’re betting that they are going to be able to keep it together financially over the long haul, and if you lose you will be liable for the entirety of the chit that is still outstanding. Clearly, not something entered into lightly. If you do choose to lend your name and good credit rating to their cause, you have both rights and responsibilities that you should be fully aware of before entering into any agreement.
Weighing the Risks and Rewards
Not to put too fine of a point on it, but cosigning for someone else’s loan has a host of downsides, and very few upsides with the possible exception of the warm and fuzzy feeling you get when you help your kid get their first car, or assist a sibling in financing their first house. That being said however, warm glowing feelings rarely last longer than the terms of a note, so it behooves you to be very proactive throughout the negotiating of the contract to that day when you receive your discharge of debt letter in the mail.
Your Responsibilities as a Cosigner
Regardless of what is being purchased, whether it is a credit card, car loan, mortgage, or business financing, once you have affixed your signature you are a full blown borrower against the note. Many people erroneously assume that this arrangement means that the lender will approach them only as a last resort, but the reality is that you can be approached at any time and doesn’t need to demand payment from the primary borrower first. As such, cosigning for someone’s loan isn’t an esoteric, theoretical possibility of financial responsibility, but rather the potential for having to come up with real cash when that first payment is missed.
Check out our piece on joint mortgages.
Your Rights as a Cosigner
Since you bear all of the responsibility as a cosigner on a note, you also accrue all the rights associated with being a borrower as well. As such, when you sign for a loan the lender must fully apprise you of the terms and conditions including interest rates, duration, and other credit costs that come with the obligation. Remember, just as if it were your own loan, if the terms are unsatisfactory you can always walk away from the negotiating table and find another deal.
Once you have agreed to the terms and signed the personal loan papers, you are now entitled to all information about the account at any time. Also, you should be alerted to account activity such as when the other party makes payments or misses a payment, and you will be notified if the terms of the loan are altered in any way.
The rules are different as applied to business loans however. If you have cosigned on your brother-in-law’s Pub and Steak-fest sandwich shoppe for instance, you might not receive all copies of the loan documents. That’s because the Canadian Bankers Association (CBA) has developed and adopted a model code of best conducts for conducting loan deals between banks and small to mid-sized businesses looking for financing in Canada. Before assuming any responsibility for a business loan therefore, you should check out CBA’s website for fuller discussions of your rights as a business loan cosigner.
Information is Power
According to the Financial Consumer Agency of Canada (FCAC), avoiding the pitfalls of cosigning means asking questions, understanding the answers, and staying informed on the status of the account at all times during the life of the loan. Communication with our primary borrower is also critical, so you are both fully comfortable with the terms of the agreement, and both understand the stakes that involved in the event of a default. If you have questions or concerns about your rights as a cosigner on personal or business loans, be sure to check out the information you need on FCAC’s website.
Don’t forgo your desire to help out a loved one in need of a cosigner, but get the information you need first so you know exactly what you are getting yourself into.
