In today’s episode, “Do NOT Cosign that Loan,” I’m going to tell why it’s NEVER a good idea to cosign a loan for a friend or family member, whether it’s a credit card, car loan, or a mortgage. Cosigning is hazardous to your financial and relational health. There are both money consequences and relationship consequences when someone defaults on a loan that you’ve cosigned. Potential risks include seizure of bank accounts, garnishment of your paycheck, ruined credit, and ruined relationships!
• If you’ve followed my blog or podcast for any length of time, you know that I have made A LOT of financial mistakes in past. Surprisingly, this isn’t one of them! However, I’ve encountered quite a few people who have reaped the negative consequences of cosigning a loan for a friend or family member.
• I think it’s important to understand why a bank would want a cosigner for a loan in the first place. Banks typically require a cosigner on a loan when the applicant doesn’t meet their lending criteria. This usually means that the applicant – your friend or family member – has bad credit, no credit, too much debt, not enough income, or some combination of those things. Banks have lending formulas and stats down to a science. Lending is their business and they have deemed your friend or family member a bad business risk.
• What does it mean to cosign a debt? Essentially, you are volunteering to be legally and financially responsible for the entire debt if the original borrower does not pay for ANY reason. If the person becomes unable to pay because of financial hardship, the lender will come knocking on your door expecting you to pay in full. If you try to avoid paying it, the lender can submit negative information on your credit report and take legal steps to recover the money including wage garnishment and attaching bank accounts. Cosigning means that you are removing the financial and legal consequences of that debt and placing them on yourself.
• “But I want to help!” you might say. Then GIVE them the money that they need. If you can’t afford to give them the money, then you can’t afford to cosign. Default rates on co-signed loans are as high as 75%. Yes, you heard me right! If your friend of family member is truly worthy of the help they need, see if you can get a group of people together to help pitch in.
• “My brother/ girlfriend/ best friend will be upset with me, is pressuring me, or is making me feel guilty about saying NO.” I understand that money is emotional! However, it’s important to recognize that when you make financial decisions out of emotion, it’s usually going to be an expensive learning experience. If you have a habit of caving into pressure from others, get a copy of the book “Boundaries” by Dr. Henry Cloud and read it!
• Cosigning when you can’t afford to foot the bill is putting your own financial heath at risk. Your income is the life blood of your personal finances. If you suddenly have a large payment to make on someone else’s debt, you’re going to lack fund for your own goals. It’s like pledging to donate more blood to the Red Cross than you have to give. Let’s pretend that you decide to donate blood once a month. The average human body contains 10 pints of blood; usually 1 pint is taken during blood donation. What if your friend pledged to donate 1 pint of blood for three months, and asked you to cosign. If he didn’t donate the blood, the Red Cross could come for you at any time and demand you “pay up” the balance. The human body can’t afford to lose more than 3 or 4 pints at one time without risking major problems. I don’t think that any of us in our right minds would ever agree to do that. And yet, people do the equivalent with their money when they cosign!
• What about cosigning for my spouse/ fiancé, boyfriend, or girlfriend? If you are married, this is a non-issue. When the minister says, “And now you are one,” that means financially, too. Do NOT cosign for your fiancé, boyfriend, or girlfriend. Some weddings never happen! It’s bad enough to experience a breakup and then you are stuck with a monthly payment as a reminder of that person you want to forget. This happened to a friend of mine who cosigned for a car loan for her then-boyfriend. Within a few months, he wrecked the car, they broke up, and the lender came after my friend for payment. It wasn’t pretty!
• What about cosigning a loan for one of my children, since they don’t have any credit? I would much prefer that you teach them how to save up and pay cash for a car. They will take much better care of a car that they had to work for. A secured credit card is a better method to build credit than to teach your kids a lifetime habit of car payments.
• I hope I have thoroughly convinced you of the evils of cosigning, and I hope you will avoid it like the plague! Even God thinks it’s a bad idea. In Proverbs 22: 26-27, it says: “Don’t agree to guarantee another person’s debt or put up security for someone else. If you can’t pay it, even your bed will be snatched from under you.”
• My job is make sure you get and STAY financially healthy, so I hope you have found today’s topic, although a little heavy, very educational. And please share this link with someone else who may need it.
Thank you for listening to this episode of Financial Lifeguard on Duty. As always, I am available for both in-person and virtual coaching sessions. You can schedule your financial coaching appointment by emailing me at Christine@ChristineLuken.com I look forward to talking with you next time. Until then, have a great week!