Have you or would you co-sign a loan for a family member or a friend? Here are 6 good reasons why you should NEVER do it!
6 Reasons Why You Should NEVER Co-sign a loan
1. Odds are good you’ll end up paying the loan
There’s a reason a creditor requires a co-signer for a loan. The criteria they use to qualify the borrower is telling them the person is unable to make the payments. Therefore, they look for someone else that is able to make the payments if, or rather, when the borrower stops paying.
Did you know 3 out of 4 loans end up being paid by the co-signer?
I understand you want to be a good person and help out a friend or family member. You’ve got the best intentions, and a majority of the time so does the borrower. But, you need to realize you’re operating on emotions and feelings, while the creditor operates on facts. If they, knowing all the facts, don’t believe the person can handle the payments, why would you?
2. All risk, no control
When you co-sign a loan you become 100% liable for paying it off. Unfortunately, the creditor will not notify you when payments are late or aren’t being made. You won’t be able to get any information from the creditor on the status of the loan because you’re not the original borrower.
Often, by the time the co-signer is notified of missed payments, fees and penalties have already been added, making the loan payoff much more costly. You assume all the risk but have no control over how it will play out.
3. If the borrower doesn’t pay, the creditor will sue you first
Most people who co-sign are not aware that a creditor will often sue the co-signer first. It doesn’t matter to them who the borrower or co-borrower is. They will go after the one party that’s more likely to pay, and that’s the co-signer.
4. It may ruin your credit and ability to borrow in the future
Sixty-five percent of your credit score is based on the amount owed and payment history. Missed or late payments have the largest negative impact (35%) on your score.
A loan that you co-sign will show up on your personal credit report. This increase in the amount you owe may negatively impact your credit score, making it difficult for you to borrow in the future. Any default on the loan will have a serious negative impact on your credit score and your ability to borrow, which can last for years.
5. Your own assets may be taken from you
In addition to a co-signer, some creditors require collateral to approve the loan. Collateral is an asset, such as a car or personal property, which has equal or greater value than the loan amount. If the loan goes into default, the creditor has the legal right to take possession of the asset and sell it to recover their loss.
6. Your relationships will suffer
The best reason to never co-sign a loan is that it can damage your relationships. Feelings of hurt, resentment, even anger, are not uncommon when financial agreements go south.
You may think you’re helping by co-signing, but the statistics tell a different story. Protect those you love and your relationships by adopting a “no co-signing policy.”
Decide ahead of time how you will answer a friend or family member should they ask you to co-sign. Your response should be caring and filled with generosity.
- Be loving but firm. "We have a no co-signing policy but ..."
- Provide alternatives. Give them the money as a gift. Better yet, give them the opportunity to earn the money through a job or service they can provide.
- Offer real help. Help them develop a budget that will serve to improve their finances so borrowing will be unnecessary.
- Give the gift of financial education. Give them a book, buy them a financial course, or hire a coach to help them better manage their money for the rest of their lives.
Most people don't want a hand-out but a hand-up. Your gesture of generosity is more likely to motivate them to improve their financial situation through hard work and increased responsibility. That's a better outcome!
Share your experience with co-signing. Your experience, good or bad, will most certainly help someone.