No-Nos #241: Cosigning Loans with Your Pals
Posted by Cap in Personal Finance |So John wants you to cosign a loan with him. Well, you better think twice—because it’s generally a very bad idea. In fact, the same goes for cosigning loans with your relatives.
It’s one thing for a parent to cosign an auto loan with their child, it’s another for you to cosign a loan with your friend, cousin, or nephew. I’m often surprise that people don’t fully realize the possible consequences when they cosign a loan. How many stories have you heard, where friendship gets ruined due to a cosign loan?
Look, who doesn’t want to help their friends when they’re in need? But before you decide to help your pal out by cosigning a loan, there are a few things you need to consider.
First, why does your pal need a cosigner?
I’d hate to say this, but your pal got into credit doo-doo for a reason. There are situations where it really isn’t their fault: no credit, fraud, identity theft, or past cosigning fubars. But then there’s the usual reason why a person needs a cosigner: they pay late, they miss payments, and they simply don’t care. It’s important to know the real reason.
Second, can you afford to pay the loan?
Because in all seriousness, you might end up paying it—or at least, quite a bit of it. You need to realize that you’re legally obligated to the loan as a cosigner. As evident, your pal has bad credit. So bad that the lender doesn’t think he’ll ever pay back the loan. That’s where you come in. That’s why they need your name on the dotted line, so you can pay them back when your pal fails to pay.
Third, is the friendship worth it?
Because again, in all seriousness, it may be in jeopardy if you decide to cosign a loan with your pal. It’s almost like lending a large sum of money to your pal (No-Nos #138). Suddenly you’re no longer John and Jim, you’re the Lender and he’s the Borrower. You’ll ask him if he made this month’s payment. You’ll get mad if he misses a payment. You’ll get upset when you see him spend money recklessly. He’ll get annoy at you for not trusting him, you’ll hate yourself for trusting him. Not cool, not fun.
This isn’t the way to help.
If your pal has bad credit, as mention, there’s a reason for it. If it’s because he’s untrustworthy in terms of credit, then he needs to shape up his financial handling and fix his credit. Yes, you’ll want to help your friend, but this isn’t the way to do it. Cosigning a loan to an irresponsible person will only worsen the problem. What will make this loan any different than the past loans that he defaulted on? What’s change that his credit doesn’t reflect?
Yeah, credit history and credit score are by no means definitive, nor are they the true measurement of a person—but they’re pretty dang close in terms of credit worthiness.
Sure, there are ways to potentially prevent damages before you cosign a loan, e.g., negotiating specific terms with lenders, request lenders to notify you upon missed payments, etc. But the easiest way to prevent the possible legal, financial, and emotional headache is to just avoid the problem in the first place and not cosign the loan with your friend.
Yes, there are exceptions. Who cares. This is No-Nos #241, not Go-For-It #32.
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June 28th, 2006 at 6:19 am
Short of roommates buying a place together, do people really do this?
I only know of two or three sets of friends who have done this, and it’s only ever been to buy a primary residence. Other than that, why would anyone yoke themselves like this?
Great post! It really highlights the credit risk you take by co-signing with someone who is less than creditworthy.
June 28th, 2006 at 10:22 am
You are SO right about one of the reasons that a person might need a co-signer” on a loan is that the place where they are trying to get the loan from can see they are a bad credit risk. At the time they are asking you to co-sign for them most likely they have every intention of paying their payments on time, but unforseen circumstances happen. It could be a good way to ruin your friendship and credit rating all at the same time!
June 29th, 2006 at 1:13 am
My step-mother co-signed a loan. Though my credit rating was sound, I had no income due to a massive recession in my field. I have since re-financed her name off the lein and sent her flowers. She never paid a cent. If she ever needed me, I’d be there. But not only are we family, but we’re both financially saavy and responsible. Still, I wasn’t so sure I’d ever get a job. Extended unemployment can wear on ya. She had faith in me when I had lost it. Now I’m doing damn well. And I still own my home.
June 29th, 2006 at 6:17 am
Or, you can co-sign the loan on the condition that your friend sign another contract, whereby if he misses a rent payment he owes you… his soul!
It’s always good to have a couple extra souls tucked away somewhere. You never know when you’ll be struck by a mysterious voodoo curse. It’s just like life insurance.
July 3rd, 2006 at 6:32 am
Relatives can be a problem, too. My fiance co-signed a $55K student loan so his younger brother could go to a swanky culinary school in San Francisco. We then found him a great job and furnished an apartment for him in our city on the East Coast. Without warning, he quit the job, left the apartment and all our furniture a mess, owes the landlord back rent, and is back home with Mom (who also has crap credit) with no job and no prospects. He did leave evidence of many fresh store credit cards, though. He also failed to consolidate by the July 1 deadline, I’m sure. I think fiance can get off the loan in 2 years, but until then, we are SUNK. We also “loaned” this brother money for a laptop he had to have, wired him money on Thanksgiving and on and on. My advice: DON’T DO IT!!!!