Over the years we have seen some lenders engage in some really awful tactics, the latest shady move is something that borrowers need to understand and avoid.
A few years ago the cosigner of one of my colleges passed away. Despite the fact that she had never missed a payment, her lender called her to inform her that she needed to add a cosigner to the loan. She smartly said she didn’t need to and ignored the lender request. To this day, the lender website says her loan is “incomplete” because it needs a cosigner to be added.
What’s wrong with this picture?
One of the things every consumer should understand is that cosigning a loan makes you legally responsible for the debt. If the borrower fails to repay the loan, the cosigner has to pay it off. This is a huge responsibility and a huge liability. Even if the borrower never misses a payment on the student loan, the debt still appears on the cosigners credit report and can make large purchases like a house or a car far more difficult.
The reason that cosigners are sometimes necessary is that the borrower has a bad credit history or no credit history. When lenders are unwilling to loan money to an individual, adding a cosigner can make the loan happen. The huge responsibility is often undertaken by parents or grandparents who understand the obligation that they are taking.
When a lender asks you to add a cosigner to an existing loan, they are essentially asking you to add someone else to be legally responsible for the debt. There is no reason for a consumer to ever willingly add a cosigner to loan that has already been issued. The interest rate and loan terms stay exactly the same. All you do by adding a cosigner is give the bank another person that they can chase after if the debt isn’t paid for whatever reason.
Making matters worse
For most student loan borrowers, the lender is both an authority figure and a key source of information. The lender has a right to collect monthly payments and can reasonably be expected to call borrowers who do not meet their obligations. When borrowers call their lenders, they often have questions or clarifications and the count on the lender to be honest and trustworthy.
The fact that there is a big difference in the balance of power in this relationship makes things that much worse. Trying to force the addition of a cosigner is not just a bad move, it is the lender taking advantage of a consumer who trusts them and doesn’t know any better. My college, as an attorney, knew she didn’t have to add a cosigner and wisely ignored the request. Many borrowers may not know any better, and could fall victim to this shady tactic.
The one exception
If your lender is asking to add a new cosigner after the passing of your original cosigner, it is time to take a very close look at your loan contract. Some loan agreements call for the loan to be due in full in the event of the passing of a cosigner. Lenders write this provision into the contract so they can collect money from the estate of the cosigner. This questionable tactic has been called out by the Consumer Financial Protection Bureau and has been the subject of some public scrutiny.
If they cannot make the loan due in full, you don’t need to add a new cosigner. If your cosigner passed away a while ago, odds are pretty good that they won’t be making the loan due in full, because the estate will have already gone through probate.
If your lender is telling you that you need to add a cosigner to an existing loan, they may be trying to take advantage of you. This is likely a lender that should not ever be trusted until you can independently confirm what they are telling you.
Finding yourself in this situation may be scary, so if you have any doubt, visit a local attorney who can take a look at your loan contract and advise you accordingly.