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Should You Or Should You Not Co-Sign A Loan?

March 24, 2014 0 comments

by Lizzy Bale

couple looking at documentsHave you ever had someone ask you to co-sign a loan? If a family or friend asked you for help but it involves putting your name on the line, do you think you can do it? You may be thinking: you do not need to give or borrow money anyway. All you are required to do is to sign your name as the guarantor of the loan that they are getting. No harm done right?

That is where you are so wrong.

Debt has devastating effects to your future and you will most likely resent it once you feel the effects in your life. It is bad enough if you were the cause of that debt. But what if it was not your doing? What if the debt that is ruining your credit report is caused by someone you trusted? Isn’t that more irritating and devastating? Not only is your finances in trouble, your relationship will be damaged too.

Why co-signing someone’s loan is dangerous

There are many reasons why co-signing a loan is not a good idea. Before we can dwell into that let us look at three different stories that will give you a glimpse of cosigned loans gone bad. These are all entries that we got from About.com.

  • Guest Nicole. This entry talked about how the daughter was convinced by her mom to co-sign a loan. The mom had a history of not paying her bills on time but the daughter, having refused to believe that her mom would do it to her, went ahead and gave her trust. The end result is as expected. The mother did not pay the loan and lied to her daughter about paying. The daughter ended up paying for the loan herself.

  • Guest Tim. This is a father-daughter scenario wherein the former help the latter get a college loan and car loan. The end result similar to the first – the daughter did not pay for the debt and the father had to shoulder $70,000 in payment. He cannot buy a home with his new wife and he cannot help his other children go to school. All because he tried to help a daughter that could not be trusted with money.

  • Gotplayed. The last sample of a cosigned loan gone bad is the story of a grandparent who was duped by the grandson and mother to co-sign the student loan. Both of them stopped communicating. As grandparent gets older, the loan is becoming a threat to the funds that should have been allotted for a comfortable retirement.

All of these are real stories about how co-signing a loan can drive families apart.

3 reasons why co-signing a loan is not helpful

The intention of most people when they decide to co-sign a loan is to help the friend or a family member who is in need of financial assistance. According to the FTC.gov, co-signers are those who are asked to guarantee the loan. That means, in case the borrower does not pay off the loan, it will be the responsibility of the guarantor to pay it back. If the borrower keeps the unpaid debt from the co-signer and it ends up accumulating interest and late charges, it will reflect badly on their credit report. And they have to pay all of that – principal debt and additional charges.

If you think that you are really helping your friend or relative, you need to think again. Here is the real story.

  • They will not learn to rely on themselves. When something bad happens, their first instinct will be to look for someone who will help them. They will not try to rely on their own strength and capabilities to deal with the financial problem.

  • They will always think that there is an easy way out. Since you were so willing to help out, your friend or relative will always think that there is an easy way out. If they cannot get a loan on their own because of a bad credit report, they will not be encouraged to correct that. They will not learn to display better credit behavior. They will just look for someone to help them out and borrow in their behalf.

  • They will not feel the value of their achievement. If your friend or relative had an easy time achieving their goal, the value of that will be lesser than it should have been. There is nothing like working hard in order to reach your goal. You are stealing that from the person you are helping out.

Do you really think, that these three will teach your friend or relative a lesson? Instead of teaching them to work hard, you just made things easy for them.

Tips in case you decide to co-sign loans

In case you really feel the need to help out by co-signing the loan, you need to do a couple of things first. This is more of to protect yourself but it is also to teach the actual borrower some sense of responsibility.

  • Know the person your will co-sign a loan for thoroughly. There are stories of new “boyfriends” or “girlfriends” who disappeared soon after they got a loan with a co-signer. Do not be a victim and make sure you know the person well before you entrust them with your credit report and your money. Remember that your credit score will be destroyed if they will not pay for the debt. You know how bad credit scores negatively impact your life so try to keep that from happening.

  • Ask why they cannot get a loan without a co-signer. If the reason is a bad credit history, ask them why they have a bad record. Maybe it is because of a thin credit history. Or maybe they just have a bad behavior when it comes to paying back the loan. If it is the latter, you should not push through with it.

  • Help them get a loan for themselves. If it is a bad credit, help them fix their credit score instead of putting your name on the line for them. That is how you teach them to be more responsible when it comes to credit. Or you can help them avoid the loan altogether. Hook them up with a side job that will help them earn money on the side.

  • Make sure all the documents are official. In case there is no alternative and you are sure that you can trust the person you are co-signing for, you still need to ensure that all your documents are in order. Read through the fine prints of the loan. Not only that, you may want to read about the laws in your state about co-signing loans. Sometimes, the creditor is allowed to go straight to you for collections. You need to know about these things. Also, you should draft an official agreement with the primary borrower to make sure that you are protected in case they end up not paying for the loan.

You have tread very carefully when you co-sign a loan because it can end up blowing in your face. Some people who have been a victim of a bad agreement gone wrong can probably say that this is among the deadly financial mistakes that they have ever committed. Remember that it is not only about the money. If you do not mind losing your relationship with the person you are co-signing for, then go ahead. That is always a possibility when you decide to give someone your financial trust.

Lizzy Bale
I am a freelance writer for DebtConsolidationUSA.com and I hope to share useful financial information to help people fight the good fight against debt.

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