3 Reasons You Should NOT Co-sign

People have good hearts. And people often feel they should do something to help friends and family when the going gets tough. Hey, I’m all for offering help when it’s needed. But you should consider any financial help you offer as a gift, since loans often cause huge problems when it comes repayment time. Here’s  a letter I received recently:

Gail I need some help. I don’t know what to do. My SIL and BIL are constantly in a mess financially. They have young kids and both my husband and I love those children.  We don’t want to see them lose their home. But I also am very afraid of how our help could hurt us. My SIL has asked us to co-sign a consolidation loan to help them out of the mess they have made. She’s a rampant shopper. He can’t manage to make his business work. My husband wants to do it, but I’m afraid that if we do this it might get in the way when we go to buy a home next year. Am I just being selfish?

D, you are not being selfish. Wanting to stay solvent so you can make your own dreams come true is not a selfish act. It’s a sensible act. And while your heart may go out to your family, particularly the kids, whose to say that another loan is actually going to solve the problem. What have your SIL and BIL done to demonstrate they’re serious about their debt problems? If their solution is simply to get a consolidation loan, that’s not enough.

Here are more reasons why you should think twice about co-signing for their consolidation loan:

  1. People who need a cosigner can’t qualify on their own because the lender believes they will default. I have heard of the odd positive co-signing experience like a young adult with no credit history whose parents sign on because they know their kid is a stand-up person who would sooner die than stick them with debt. But I’ve heard five times as many negative stories: parents who have been stuck with their children’s irresponsible behaviour; family who watch as the primary signer goes bankrupt leaving them holding the loan. If a body can’t qualify for a loan on it’s own merits, you have to wonder if you’re actually doing that body a favour by adding more weight to their debt load.
  2. Co-signed debt is 100% your debt. A lot of people don’t seem to realize this, I’m not sure why since it is clearly stated in all the loan paperwork. But here it is in black and white: If the primary borrower drops dead or defaults on the loan, you are 100% responsible for repaying any loans you may have co-signed. It doesn’t matter that you didn’t get the money. It doesn’t matter that the primary borrower swore you were off the hook. The reason you’re co-signing is to guarantee repayment, and if the lender can’t get blood from one stone, it’ll come looking for your stones.
  3. Co-signed debt is factored into calculations that determine whether you’ll get approved any kind of borrowing, including a mortgage. That’s right. Since you’re on the hook for that $27,000 loan you co-signed for, that’s $27,000 less you can borrow for your own purposes. Again, people seem not to realize that there is a limit to how much lenders will let you take on. Perhaps it’s because lenders have been so lax with this particular rule that folks think credit is unlimited. Well, the recent dry-up in the money markets should have made it clear that the credit bucket is not bottomless. Taking on the responsibility of co-signing could mean you’re ability to borrow for your own goals is thwarted.

So how do you say no to family or friends who see you as financially stable and a good resources for solving their problems? Try this…
Tonya, both Paul and I would love to help, but right now we’re just not in a position to do so financially. We would be happy to sit down with you and Tony to talk about ways you could clean up the financial mess you’re in. And we’d be happy to help in other ways, like taking the kids when you guys are working extra hard to get that debt paid off. But we can’t co-sign right now. What else can we do to help you?

If Tonya and Tony stomp out in a huff because all they want is your signature, you can count your blessings. It would only be a matter of time before that co-signed loan came between you anyway. At least now you’re not also on the hook financially.

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