If you are a mean, hard, and calloused individual, you need not read this post about cosigning a loan. However, if you have a tendency toward niceness and kindness flows within you, then you need to read this post line by line.
MSN Money says you should never cosign a loan. I’m not sure if never is the right word, but it would need to be a really unique situation.
The nicer you are, the more likely it is that someone is going to try and take advantage of you.
Consider the following two characters:
Uncle Ulcer – Uncle Ulcer is one big fat pain in the neck. This guy has skin as rough as an alligator, and he’s got one mean scar across his cheek. His language is hard, and he doesn’t think about anyone else for more than five seconds.
Aunt Angel – Aunt Angel is the sweetest old lady you ever met. She smells like chocolate chips, and her rosy cheeks are always crunched into a smiling position. She always asks about your hobbies and interests.
Who do you think you would be more likely to ask to cosign a loan? You bet – Aunt Angle.
Things You Must Know Before Cosigning a Loan
The Dangers of Cosigning a Loan
You risk a lot more than money.
If money was the only thing at stake then this might be a different discussion. However, when someone owes you money (especially when they don’t pay), it makes a relationship awkward at best.
One time I lent money to someone to help them stay out of jail. His story sounded legit, and I was glad to lend him money. He never paid me back. The worst part is that he stopped coming to church. I’m guessing it was because of the awkwardness of our relationship. To be honest, every time I see him, my first thought is “that’s the guy who borrowed money and didn’t pay me back.”
What does that have to do with cosigning a loan? When you cosign, if the person doesn’t pay the loan back, you become responsible to pay it back. That can quickly damage a relationship.
When you consign a loan you accept personal responsibility for the repayments.
If Little Johnny wants a car loan and you cosign for the loan, those payments are as good as yours. The bank will come after you for the payments if Little Johnny decides not to pay up.
The bank isn’t lending that person money for a reason.
Please don’t deceive yourself. Banks love to lend money. It’s how they pay the bills. But if a bank doesn’t think someone will pay up then you’d better think long and hard before you trump their professional evaluation.
You may not have deciding rights over the item in question.
Let’s say Little Johnny gets a car loan (which you cosign for) and the car is titled in his name. Johnny isn’t making his payments and the bank starts to come after you. You decide that the car should be resold, but lo and behold, the car is only titled to the little brat who is not respecting your wishes.
The Proverbs advise against it.
A man lacking in judgment strikes hands in pledge and puts up security for his neighbor. (Proverbs 17:18 NIV)
Your own ability to borrow and your credit score is impacted by that loan.
If you cosign for a loan, expect that to impact your ability to get a credit card, buy a house, or anything related to credit. Think about cosigning this way – it is just like you were getting the loan on your own.
The Benefits of Cosigning a Loan
To be frank, I don’t think there are a lot of benefits.
However, by cosigning a loan it is possible that in the long term you are helping someone get up on their feet. Just know that for every one person that is helped by the loan there are 100 who did not responsibly handle the loan.
Parents may need to cosign for certain items for responsible kids who have not yet built up credit, and that may be an appropriate action.
I think in the end I’d say this – if the need is legitimate, try to work out another arrangement to help that person instead of cosigning. You could help them find an alternative option (someone who is willing to lend them a car), help them find an alternative way to fund the loan (like p2p lending through something like Lending Club), or require them to take some financial classes, and then buy the item for them.
Have any of you had positive or negative cosigning experiences? Would you recommend cosigning a loan?