Being approached by a friend or family member asking you to co-sign for a loan is often a difficult situation. Co-signing for a loan in Colorado requires careful consideration to ensure that you are aware of the potential negative effects involved with co-signing for a debt, including whether Colorado allows the debt to be reported to the credit bureau.
What is Co-Signing?
When you co-sign, you allow a creditor to offer credit to someone else by using your good credit. A debtor who needs a co-signer cannot qualify for a loan on his own or may be required to pay a high interest rate. By using your credit, the debtor will qualify for a loan at rates based on your credit score. Your name is placed on the loan documents, and you will be required to sign loan documents.
Risks
Co-signing may help the debtor, but you are at significant financial risk whenever you co-sign. You are putting a portion of your financial history in the hands of the debtor. When co-signing, the debtor is responsible for paying the loan, but you are also, ultimately, responsible as well. Anytime the debtor fails to repay the debt, the creditor will look to you to make a payment. Not only can you be asked to make a payment if the debtor quits paying, but the entire debt will be your responsibility as well. Your credit can and will be damaged if you are unable or unwilling to repay the debt. In addition to your credit score being damaged, you can be sued for the debt.
Colorado and Federal Law
Both the Colorado Uniform Consumer Credit Code and the federal Fair Credit Reporting Act govern how creditors report accounts to credit bureaus. Neither the state of Colorado nor the FCRA prohibits creditors from reporting to a co-signer's credit report. When you agree to co-sign, you are taking financial responsibility for the loan and telling the lender that you agree to be responsible for the debt should the debtor fail to repay.
Avoiding Issues
You must be certain the person you are co-signing for has the ability to repay the debt, and you must feel confident that he will be reliable. Evaluating your financial situation is important as you must be able to make payments or repay the debt should the debtor fail. Contact the creditor to ensure that a system is set in place to contact you immediately if payments are missed. Failure to keep up on the payment status could harm you if the creditor reports missed payments that you were unaware of because the creditor contacted only the primary debtor. It is important to understand that Colorado does not require creditors to report the debt to the credit bureaus; however, most creditors do report the debt. By speaking to the lender, you can attempt to avoid any negative reporting to your credit report.
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