Co-Signing A Collateral Loan: 5 Ways To Protect Yourself

Most Americans simply don't have the cash on hand to make large purchases and will need to take out a collateral loan, which basically means that they will need to put up an asset to back up the loan. Depending on one's income and financial standing, collateral loans may still need a co-signer. If you decide to do a favor for a family member or a friend and co-sign the loan, be prepared to be stuck with the loan because 3 out of 4 primary borrowers default on their loans according to the Federal Trade Commission. If you're still headstrong on becoming a co-signer, these five tips will protect you.

Draft Up a Promissory Note

Don't rely on only the terms and conditions of the collateral loan agreement. In the event that the primary borrower defaults on the loan even when they have put up collateral, you may still be stuck with debt if the asset happened to decline in value over the years. Draft up a promissory note that will detail what obligations the primary borrower has to the loan, the terms and conditions should they default on the loan and other information. You can include all sorts of stipulations. Just make sure you get the promissory note properly notarized.

Review the Terms and Conditions of the Loan Agreement

Just because you're not the primary borrower doesn't mean you should be left in the dark. Play an active role in finding a collateral loan agreement that suits both you and the primary borrower. Make sure you review the terms and conditions of the loan agreement so you are fully aware of what you're getting yourself into.

In particular, pay attention to the fine print that details any fees that may be charged for late payments and how a defaulted loan will affect your credit score and financial standing. It's important to also negotiate a good interest rate – just in case you end up taking over the loan at the end.

Determine Whether It Is Possible to Establish an Exit Strategy

Most of the time, the financial institution will only request for a co-signer if the primary borrower does not have sufficient income or a high enough credit score despite the fact that a collateral is put up. For larger loans where there is a possibility for a significant amount of interest to accumulate or for the asset to decline in value,  a co-signer can still be on the hook if the loan is defaulted upon. If the primary borrower doesn't have any significant assets, you may be required to put up an asset for a collateral loan. In these situations, your assets will be on the line.

Because of this, you should consider discussing an exit strategy. For example, you may be able to co-sign for a smaller loan for a small period of time. Once that period passes, the primary borrower will be able to extend the loan or get a larger loan all on their own without your help. The goal is to make sure you aren't responsible for the entire loan.

Collateralize the Deal

If you are co-signing a loan for a car or another asset, collateralize the deal. For example, if you are co-signing a car loan, ask for a set of keys to the car as well. In the terms and conditions of the loan agreement, make sure it specifically states that you have the right to take possession of the car if the primary borrower is unable to make payments.

Check In Regularly

If the primary borrower defaults on the loan, you'll be held responsible. Because of this, it's important that you check in regularly with the primary borrower to make sure he or she is making payments on time.


Make sure you understand that you are taking on a huge responsibility by co-signing a loan. If the primary borrower at any time defaults on the loan, you will be held responsible for paying back the loan. This can greatly affect your financial standing and your credit score. Before co-signing the loan, take appropriate measures to protect yourself. For more information, see a website such as