Co-sign your way to problems

By Gary Silverman, CFP®

At some point in time, if you’ve been a good with money, someone (let’s call them a “friend”) might ask you to co-sign a loan for them. Some of you, about 20%, are going to say yes. Let me think about a time when that’s a good idea.

Hmmm.

 Ummm.

Well… (Still thinking.)

Here’s how I see it: You are only going to be asked to co-sign a loan because whoever wants the loan would otherwise be turned down by the loan company. Now, the loan company is in business to make loans…sort of. It’s like when you go to the bank and deposit money into a savings account. Your motivation is not to give the bank money. Your motivation is to have the bank save your money, pay you interest on your money and, more importantly, to give your money back to you sometime in the future. In a credit situation, the loan company wants to receive both the interest from the money it loans as well as the original loaned money, eventually.

If you’re being asked to co-sign, it is because the loaner doesn’t think your friend can afford to pay them back or just won’t get around to doing it. Remember, the loan company doesn’t make a profit if they don’t loan money; they also go broke if they repeatedly loan money to the wrong person. They have decided for some reason your friend is the wrong person.

So, by co-signing, you are basically saying you think your friend is perfectly suited for the loan, despite the evidence to the contrary.

Here are some findings from a recent survey by CreditCards.com of over 2000 loan co-signers:

Over 1/3 were stuck with some or all of the bill.

Over ¼ ended up with a lower credit score from the experience.

Over ¼ said the result was a damaged relationship with the person they cosigned for.

That should give you pause.

Now I’m not a credit expert, nor have I ever co-signed a loan (don’t bother asking). But I do have this column and you do seem to read it, so I guess you want to know what I think. I have no problem with you co-signing a loan as long as you will not be harmed by it and don’t mind if the loan recipient sticks you with the payments.

“What?” you may ask. “I can’t afford to get stuck with another car payment!” If that’s the case, why are you co-signing your kid’s car loan? If they get behind in payments you are legally liable to catch them up. If you can’t afford to lose the money, don’t sign a paper that makes you liable for it.

Make sure of these 3 things before you sign on the dotted line:

You won’t be financially harmed if you have to personally pay back the entire loan.

You would not hold it against your friend if, for an unexpected and unavoidable reason, they couldn’t pay off the loan.

You’re willing to both forgo your friendship (say, if they totally bail on their responsibility) and still pay off the loan.

Follow your heart, but use your head.

This article was published in the Wichita Falls Times Record News on July 24, 2016.