Cosigning a Loan: How can I protect myself if I cosign someone else’s loan?

Think carefully before agreeing to cosign someone’s loan. You will be responsible for repaying the loan if the borrower does not. The loan will likely appear on your credit reports, as well as the borrower's credit reports.

If you:

1. Understand the risks of cosigning a loan, and
2. Still decide to cosign someone else’s loan

then there are two things you can do to help protect yourself:

• Get notified. Ask the lender to let you know if the borrower misses a payment or the terms of the loan change. The lender is not required to notify you of these events, so you need to ask. Get the lender's agreement to notify you in writing, before you cosign. The notifications will give you time to deal with the problem or make payments without having to repay the entire amount immediately.
• Get copies. Double-check to be sure that you get copies of all important papers concerning the loan, such as the loan contract and the Truth in Lending Disclosure. These documents may be useful if there’s a dispute.

For more information, read this article from the Federal Trade Commission (ftc.gov).