Erie E-Law is a FREE service of the Erie County Bar Association designed to make basic legal information available to you with ease. You can gain access to E-Law either by reading the information found below or by contacting us to request a copy of the transcripts.

Co-Signing for Loans & Purchases

Posted on August 22nd, 2018 at 11:07 AM

If you need to consult with an attorney or would like more information on co-signing for loans and purchases, please contact the Erie County Bar Association's Lawyer Referral & Information Service.

Co-signing on a contract to obtain a loan or to purchase goods on installment payment is a simple act. However, that act of signing your name on the loan agreement or contract next to or under the signature of the person entering into the contract could have serious legal repercussions for you in the future.

The act of co-signing on a contract for a loan or purchase is an agreement by you to pay off the loan or purchase price if the other person fails to do so. This pay off would include any interest charges, late charges or collection fees that may be specified in the contract. It also means that if you fail to live up to your agreement to pay off the contract, you could be sued to collect the amount owed and could lose some of your property or assets in the process.

A co-signer is sometimes called a "surety", a "guarantor" or an "accommodation party". Regardless of the name attached to it, the basic agreement to pay off the loan or contract price if the other party defaults, are always present. Likewise, regardless of the term used, you may be sued to satisfy the obligation if the loan or contract is not paid off.

If you are asked to co-sign on a loan or installment purchase there are several things you should consider before doing so. Most importantly you should consider whether you can afford to pay off the loan or contract if the other person stops making payments. This is a very real possibility since the other person is not a good credit risk or they would not need you to co-sign in the first place. If you cannot afford to pay off the contract, you should not co-sign on it and take on the legal obligation to satisfy it in the future.

Sometimes co-signers are also asked to put up some of their own property, such as their car, as collateral for someone else's loan. If you do so, this property can be seized if payments are not kept up on the loan, often without the filing of a lawsuit. Allowing your property to act as collateral for someone else's loan is an extremely risky proposition and you should carefully consider whether you should do so. Again, before co-signing you should ask yourself if you can afford to pay off the loan because it may be necessary to do so to protect your property.

Anytime you co-sign you should be sure that the contract specifies that you will be notified if the other person gets behind in their payments. This is especially important if you allow your property to act as collateral for someone else's loan. This notice will allow you to act promptly to protect yourself from being sued and to prevent the seizure of your property.

If you do co-sign on a contract for a loan or purchase, you should be sure to get copies of all of the important documents relating to the transaction. This would include the loan agreement or contract, the Truth-in-Lending disclosure statement and any security agreements executed relating to collateral for the loan or contract.

If the other party defaults on their obligation and you, as the co-signer, are forced to pay off the obligation, the other party then becomes liable to you for the amount which you paid to satisfy the obligation. This creates a legal right for you to sue the original debtor to collect the money which you paid.

Keep in mind, however, that the other person was a poor credit risk, to begin with or you would not have had to co-sign. Also, that person has just failed to live up to their obligation on the debt you had to pay off. Therefore, your right to sue that person may be of limited value if they don't have any money or assets to draw from to compensate you for the money you have paid out on their behalf.

All of these factors should be carefully considered before you agree to co-sign with someone else on a contract for a loan or purchase. Most importantly, be sure that you can afford to pay off the loan or contract if it becomes necessary to do so. If you cannot afford it, you're placing yourself in a position to be sued on that obligation and could stand to lose some of your own property.

Information is current as of 4/2018.