3 Reasons You Should NOT Co-sign
Posted by Gail | Filed under Debt Traps
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, who is 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 three good reasons why you should think twice about co-signing for a 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 for which you co-signed, 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 your 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, 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.
February 18, 2010 at 7:03 am
I’ve learned this lesson the hard way. I’m co-signed on a vehicle loan with my ex-husband (signed it right before the marriage went down the toilet). Now, three years later, I’ve been denied both a vehicle loan and mortgage, both of which I really could have used, because that loan is still counted against me. (Even though he got the vehicle in the settlement). I am at least grateful that he continues to make the payments on time every month. I’ve realized that he could easily destroy both of our credit ratings if he wanted to too.
February 18, 2010 at 7:35 am
My DH is self employed and it is one reason why I do not have my name (and signature) associated with his business. To protect both of us and our family. I do have signing authority at the bank for issuing pay cheque, etc and should something happen to my husband I have access to the bank account to keep the company going until things are sorted out.
My FIL did co-sign a loan many years ago for my DH to make a business purchase and I think back to really how risky that was given how young my husbands business was at the time. Thankfully, the loan is gone and no longer an issue.
February 18, 2010 at 7:45 am
I ALWAYS explain in DETAIL exactly what it means to co-sign when someone is in my office wanting to co-sign for someone…on more than one occassion I have had the co-signor decline to go through with it once it was explained to them what it all meant and how it would affect them and their potential future credit needs…if you are considering co-signing make sure you get ALL the details!!!
February 18, 2010 at 8:03 am
I’ve seen a few family mambers burned by other family members due to co-signing. My father offered to co-sign a loan for me as soon as I was out of College “to build credit history” I declined the offer and build my own credit history over time.
Regards,
Jason
February 18, 2010 at 8:06 am
Yep Don’t co-sign even for your first born I guess….well its up to you
My buds got everybody after him…he co-signed for a 15 year “friend”
Of course a friend isn’t first born, but first borns will do it to you to.
There is sanctitiy nowadays in I can’t pay it, what me worry? but thats why I got you to co-sign it! , can’t you and mom help me out!
This has resulted in about $7500 of lawyers fees for him, to start of course, its going way past that, now everybody will make money off the deal but my bud.
February 18, 2010 at 8:10 am
Luckily, the only experience I’ve had co-signing was a good one but Gail would probably smack me upside the head for having done it. I did it for a 21-year old friend of the family because he struck me as a guy who would rather die than default. He had no credit history and needed the money to finish school. He was never late with a payment and put just about every dime he made after he graduated towards paying this off, even though it would have been more advantageous to pay off his car loan first instead. He realized that his debt was considered mine as well and felt it should be paid off first. Since that was before Gail, I guess I was just really lucky.
February 18, 2010 at 8:14 am
I heard long ago that a “safe” way to help a child build credit was to cosign for a loan, then the parent keeps the money invested in a guaranteed investment or high interest savings account. Then the money is repaid. It’s all done with the intention that the money is never actually to be spent.
Has anyone ever done this? How long would you have to have to have a load in order to build credit? I really have no idea how long it takes to establish a rating from nothing. Most discussions revolve around preserving or repairing your rating, but not how long it takes to go from zero to a good rating.
February 18, 2010 at 8:24 am
My mom co-signed a car loan for me when I was 19, but I was one of the young adults you speak of that would never let this default. (Of course, looking back I really didn’t need a $20,000 car at that age, but that’s a different topic!) A couple years later my mom co-signed a student loan for my brother and unfortunatley he defaulted a couple times, resulting in the bank calling her looking for money. He did not have a good history financially, but mom admitted she felt guilted into signing for him. Obviously she regretted that later.
February 18, 2010 at 8:45 am
Jenn, I sorta did that. I was bankrupt after an ex-boyfriend took me to the cleaners. I had no choice. There was no way I could dig myself out of the whole he had dug for us. I had no one to turn to for financial help. I was young and naive about finances.
A close friend co-signed a $3000 loan for me to help me re-gain credit. I banked the money and made large payments each month and paid it off early. This was very helpful to me and I am very grateful to her.
Now that many years have passed and my credit is good, I would not be able to/willing to co-sign for someone else. I have a home and a family to consider.
The only person I would co-sign for is the friend who gave me a hand up.
February 18, 2010 at 8:52 am
Unfortunately I had to learn this lesson the hard way. A couple years ago I co-signed on a car loan for my brother. I told the guy who was giving him the loan that I was only working full time that summer, and by September I would only be working part time. He actually told me that it was just a formality and it had nothing to do with me as my brother would be making the payments.
Only a few months after taking out the loan, my brother thought it would be a good idea to quit his job here and drive to the other side of Canada to work for $10 an hour. Needless to say he was’t able to make his payments on time and at times not at all.
To make things worse, my car kicked the bucket much earlier than I had thought it would and becasue of the loan for him, I could’t get a loan myself to get a new one. I then had to go to my mom to take out the loan for me (irony. haha)
Before all this my brother and I were very close, but after all this we hardly spoke for a very long time (except to yell at each other) Thankfully he came to his senses and moved back home and he was working two jobs to pay off the car (which he now has) and we are finally getting along again.
Lesson learned!
February 18, 2010 at 9:46 am
This is certainly a tricky issue. About a year ago my BIL asked us to sign off on a consolidation loan after a nasty separation/divorce, and I had to be the meanie and say no. My husband, generous soul, wanted to help (and so did I-I did feel for him), but I showed DH our budget and asked him where the payment would come from if his brother didn’t pay. He wasn’t happy with me for a bit, but he came around and realized that we had worked hard to put ourselves on good financial footing, and co-signing would put us at risk. I felt like a hypocrite because my parents co-signed for me for a loan during school, but I’d seen his brother make years and years of money mistakes and not learn his lesson, while that humbling experience of having to ask my parents for help was the turning point for me. I also worried that the tenuous relationship DH had with his brother would crumble and disintegrate forever if there was a defaulted loan to argue about. Now they are closer than they have been in years, so I know I made the right decision.
February 18, 2010 at 10:07 am
I would never cosign a loan for anyone, and never have. Nor have my parents ever offered too. If you really think about it, you shouldn’t need a cosigner – if you don’t earn enough to qualify for the loan on our own, or have a spotty credit history, you don’t qualify.
As for building credit – I think for most young people, getting a credit card and using it as revolving credit is usually the first step to building a history. Then you get a line of credit, and then usually a car loan and then a mortgage. At least that’s how I did it. For you married’s out there (like me) – make sure each of you have a credit card that’s in your own name, and not just a supplementary card on your spouse’s account.
February 18, 2010 at 10:09 am
We learned the lesson the hard way. BIL wanted my DH to cosign for a car. I was completely 100% against it knowing how this could go wrong and how irresponsible my BIL was. My DH went behind my back and cosigned anyway! I was FURIOUS, to say the least. Unfortunately, I was right. Before long, BIL missed many payments, car was in an accident and written off. Insurance wouldn’t pay for it because, guess what else wasn’t being paid???
February 18, 2010 at 10:26 am
I remember when I was 19 and went to my dad looking for a co-sign on a car loan. The loan itself was only for 8k but at that point it was huge money to me. My dad was kind to me when he refused. And in doing so, he taught me a couple of important lessons. Firstly, as Geoff mentioned, if you can’t get the loan by yourself, you shouldn’t be borrowing. If you could manage the debt load, the bank would be more than happy to give you the money. It is one of the first times I really became an adult – no one was there to cushion the blow of reality for me. I find it sad that so many parents don’t realize that it is more of a gift for their young adult children to learn that living within their means is more way more valuable than any car/loan co-sign gift.
The second gift my dad gave me was that he asked me if I had shopped around for my loan. In fact I had naively only gone to my primary FI. He encouraged me to go to at least one more and see what they could do. I ended up going to another bank, who offered to finance the loan without a co-signer. I went back to the original bank who had wanted a co-signer and told them. They obviously didn’t believe me when I told them the other offer. So in that same conversation when they refused me a second time, I followed with “ok, I’d like to close all my accounts now.” The guy was actually taken aback and asked me why. To which I repeated, “I just told you I was going to bank A who offered me the loan!”
I could tell he thought I was playing him and was not pleased that I just ended my 10 year relationship with them!
But the moral of the story was, I learned the beginning of financial independence that day and I am SO grateful that my dad never co-signed.
We were purchasing a house this year and dh mentioned the idea of looking for a co-signer if we didn’t qualify for the mortgage we wanted to get for a specific home. I adamantly refused and he thought I was crazy. We ended up qualifying on our own anyway.
February 18, 2010 at 10:27 am
My daughter learned this lesson the hard way. When she was in high school, her boyfriend wanted her to co-sign on a cell phone plan, which she did. A few weeks later, they broke up, and he didn’t pay the bill. They started calling my daughter for payment. We tried to track down the ex-boyfriend, who was nowhere to be found, and blocked our home number, so she couldn’t even call him. Eventually, the bill went to collections, and I paid the bill. Both my husband and I had a long talk with our daughter to never, ever co-sign on anything again. She hasn’t.
February 18, 2010 at 10:37 am
very tricky topic.
Unfortunatly, b/c my significant other had no credit, he couldn’t qualify for a small truck loan ($4,500) even with me as a co-signer. So I got the loan strickly in my name (i know..i know, yikes right?).
It’s actually working out just fine. The payments come out of my SO’s account, and in July of this year it will be fully paid off.
The stipulation on this loan, was that the truck would be sold to both of us. It is in both of our names on the sales receipt. I don’t know if this actually offers some protection, but at the time I felt it did.
February 18, 2010 at 11:01 am
When I was young(er) the bank told me that instead of having my parents co-sign for something they were better off having it in their own name. Then they could sell the car/house whatever if I defaulted. Not that I ever defaulted on any payment in my life. Unfortunately when I divorced (the first time), even though I had been paying EVERYTHING and working 3 jobs to do so, I had no credit history, ugh, I wasn’t the FIRST name on the credit cards or the mortgage. Dumb dumb dumb. So to sell my house at a loss, I had to take out an unsecured loan, which my FI of 10 years wouldn’t give me without a co-signer. I went across the street to the Royal Bank and they looked at where I worked, my income, and my life history, and said “I believe you will pay this”, then the very very nice man at the Royal gave me a lecture on protecting myself in the future. He said he would never give me a joint credit card again, for my own good. So I walked back across the street to the Bank of Montreal, who I had been with since a child, and closed all my accounts and credit cards. Many lessons learned.
February 18, 2010 at 11:05 am
Thanks Gail !
I just had a ‘moment’ ! Back in the early Nineties my dad co-signed for me on a sweet light blue Ford Escort – my first car. I was working and lived in a city and needed a way to get home to our small town on weekends. It would never have occurred to me to default or miss payments – but just as I was reading this I realized how fortunate I am/was to have someone do something like that for me. When he did it was because I was young and just out of high school so I had no credit but I don’t think I ever really thought of the problems that he would have had. Funny it sometimes takes about 20 years for some people to really get it
– but I do !!
February 18, 2010 at 11:09 am
I was asked to co-sign a few years ago by a young relative who had been quite irresponsible about their financial commitments. After much thought and discussing it with my spouse and getting their blessing, I gifted the young person some money I had set aside for a future vacation. It helped out greatly so that the other commitments could be met. I had zero expectations of getting any of this money back, so no resentment on my part. But surprise surprise, about 6 months later,I was contacted about a repayment schedule and the gift is slowly being repaid. It was fortunate that I was able to be in the position to do this. I would not have jeopardized our financial future by co-signing.
February 18, 2010 at 11:27 am
I’d say the one exception is for student loans. I didn’t qualify for a government loan because my parents’ income was too high. I had great credit – I had had a credit card for a few years already – but the bank wouldn’t even talk to me without a) $35,000+ of income every year or b) a co-signer.
My father didn’t want me to be in debt, he wanted to ‘just take care of it’. A great offer, but I hated asking him for money all the time. I wanted to get a loan so I could just manage my own money and so that it would be a business transaction, not a family one. So, without a loan, my only access to money was my VISA. It was pretty much maxed all through school. I wasn’t irresponsible, I just couldn’t live on my summer and part time jobs. That VISA bill was gone within about 6 months of leaving school, but I would have been saved hundreds of dollars of interest if my Dad had cosigned the bank loan for me.
February 18, 2010 at 11:39 am
My FIL co-signed our first mortgage..not because we couldn’t afford the payments but becuase back in those days CMHC made us jump through NUMEROUS hoops to secure our mortgage.. (the good ole days as Gail blogged about yesterday ) . Becuase I was only about a year out of university and had student loans (negative net worth was the term they used) and both of us had been at our jobs less than 2 years they insisted we first sell our truck and 2nd have my FIL co-sign… we both had good credit ratings.. it was just that back then they looked at some much more than just what your credit score was and if you could produce 3 months of pay stubs…
We never missed one payment and as soon as the mortgage term was up we got our own mortgage and thanked FIL very much for his help…
My BIL and his wife had/have money troubles and they borrowed money numerous times from my in laws without ever paying a penny of it back.. it got to a point where they had to either refinance the house to consolidate their debt or sell the house and move 8 hours away .. they approached FIL about cosigning for the refinance and they refused.. thank god they did.. can only imagine how that woudl have turned out..
guess you really would have to evaluate the particular situation and let only the cold hard facts sway your decision..not your personal relationship with the person.. and remeber that sometimes tough love really is the best thing
February 18, 2010 at 11:46 am
My mom co-signed for my first home mortgage, and I am eternally grateful! I suppose I could have waited a year or two to get a better credit history and be approved on my own, but I was lucky and bought my house *before* the housing inflation. I have never missed a payment, or put my mom on the hook. Now, 6 years later, my house has doubled in value and I am building equity and a good credit history because my mom helped me out.
February 18, 2010 at 11:59 am
I would consider co-signing for my children when they get older but would NEVER co-sign for anyone else. To much risk for my liking to co-sign for anyone else.
February 18, 2010 at 12:02 pm
I agree with Krista, the one exception is student loans. My first year university almost didn’t happen. Sure I saved throughout highschool creating my own RESPs, and applied for OSAP (received $1000). However I still did not have enough to make it through first year. So my mom co-signed on a student bank loan with me. She treated it just like OSAP, she paid the interest while I was in school. I ended up only having to borrow about $2000 from it while I was able to borrow up to $40,000 by my fourth year (that could have got me in a lot of trouble). But I was able to pay my mom back by the beginning of second year and never had to use it again. I was grateful that it was there and I did not have to pay for things on credit card. My mom knew I was smart with my money and would pay her back.
February 18, 2010 at 12:03 pm
My brother ended up paying off a “friend’s” debt that he had co-signed on. That, along with advice from my parents never to co-sign made me decide I would never risk co-signing.
I did borrow once from my parents, just because they gave me a better rate than the banks, and they got better interest from me than the bank would give them in a savings account. I was not a credit risk to them as I’d already proved to them that I was very responsible with debt and credit cards, it was just a win win situation for both of us.
February 18, 2010 at 12:09 pm
I totally agree with Gail, however…. My stepfather signed a car loan for me and it has all be ok. I got caught up in a bad relationship and ended up bankrupt at the end of it. I have been building back credit in all the right ways (according to the bank). One day the vehicle I was driving started pouring out black smoke and that was the end of it! I was 3 months without a vehicle while I researched all my options and tried to figure out what to do. I was at the point where I had decided that I would suck it up and pay the outrageous interest rate and borrow from one of those “give anyone a loan” car places. My mom called and said that my stepfather would sign for me. I was hesitant to accept because I knew what that would mean for them if I didn’t make a payment. Now I am nearing the end of the loan and our relationship has not been affected by this at all. I will say that I know this is not the norm and wouldn’t reccomend it but it certainly helped me out in a huge way!!!
February 18, 2010 at 12:55 pm
Best case scenerio: My husband co-signed for his younger brother’s first new car purchase. Since he had No credit history it was the only way he could get the truck that would be best for his job. One year later almost to the day, the brother went to the lender and had my huband’s name removed from the loan. He had proven that he was reliable with the payments and (thanks to the truck) his job was secure. We didn’t even have to ask. We took that chance on him because we were NOT planning to make any major purchases that year, and if he defaulted on the loan it was a mighty fine truck that we would not have minded taking over at all.
Worst case scenerio: My sister bought a business. She was young and had great plans for it, but the only way to get it was to ask for someone to cosign on the $50,000 loan. My step-dad agreed, because he wanted to give her the benefit of the doubt – she is smart, motivated and knew the business inside and out. A few years later she went bankrupt thanks to some things that were beyond her control and some over-agressive expansion. Unfortunately she did NOT warn the cosigner that it was coming. And he was stuck holding the bill for that one large loan. The inevilatble finger-pointing and arguing happened and the family was split. My sister hasn’t talked to my step dad in almost 10 years now, and my step-dad’s retirement plans were delayed significantly.
It’s so hard to say “no” to people you love, but unfortunately you need to be hard nosed about it. Basically, if you would be willing to give that as a gift, then it’s okay, but if you can’t afford to lose it (emotionally or financially) you have to say -NO!
February 18, 2010 at 1:09 pm
I’m with Gail, never co-sign. Make it a gift if you can or give something non-monetary like a big batch of frozen stew. I had some money set aside to help my brother out once he was in college. He ran into a good dose of reality before then (took a few years off to “figure things out”) and asked if I would give it to him now. I told him I had intended it for post secondary only, the place where he would earn a diploma that would give him a good job, but if he got it now I would need to see a plan of how he would pay for post secondary. I also told him that this was all I had saved for him, once it was gone there would be no more. He understood that he was on his own financially from now on and did show me a plan. It might hurt me to see him struggle in college next year, but that lesson will be more valuable to him than anything else I could give him.
February 18, 2010 at 1:31 pm
I have an experience with being a co-signer for a friend. I was 29 at the time… single and completely independent financially. My friend was younger, about 23 and a shop-a-holic. She had gotten herself into trouble with lots of clothes/shoe shopping (she had a wardrobe to die for!), and one day she hit rock bottom financially and decided to get a consolidation loan to pay off her high interest – high balance credit cards. She didn’t qualify for the loan on her own so she asked if I would co-sign on the loan. It was for $11,000. I thought about it for a day or two, then decided to do this favour for her, knowing full when I was taking a risk, and that I might be stuck with paying the loan.
In the long run, she paid her monthly payments without trouble for about a year. There was 3 years remaining with a monthly payment of around $260 if I remember correctly. Then I got the first collections phone call… and my friend never contacted me or spoke to me again after that! I paid her loan for her for about 6 months. Her mother got wind of the situation and sent me cheques to re-imburse me my money, then one day her mother phoned me and told me her daughter had filed for bankruptcy. I figured at that point I’d have been completely on the hook for the balance of the loan, which was almost half paid by then, but the collections calls stopped. I’m not entirely sure what happened, but I suspect her parents paid back the loan so as not to leave the responsibility to me. I never got closure on that loan, which still bothers me to this day, but it’s been nearly 12 years since this all happened, and my credit rating is excellent and always has been. I suppose it all could some day come back to bite me in the rear but if that happens, I’ll deal with it.
As for the friend, I haven’t heard from her since. I hope she’s doing okay and managed to learn some financial management skills over the years. If we both learned a lesson from the experience, then it was a mistake worth making. But I will never co-sign a loan for anyone ever again!!!
February 18, 2010 at 1:40 pm
#4 Reason you should never co-sign is that it can severely negatively affect your whole family.
My parents co-signed for a sibling on 2 occasions and it was a disaster both times. It even affected me – I can’t seem to get my parents crying out of my head, because of how the bank treated them many times due to my sibling’s nonpayment. What is worse is my mother felt she had to because “X won’t come and see me any more if I don’t”. This kind of abuse is becoming more common in our society and it hurts everyone. Our family has never been the same since this began and we are getting farther apart. X never saw my parents more because they co-signed. X only saw them when more money was needed or free food was offered. ITS NOT WORTH IT!!!! If you love them and your family, please do not co-sign. (I am withing this with tears flowing so please don’t do it)
February 18, 2010 at 1:42 pm
When I was 22 I was guilted into signing a loan for my current boyfriend at the time. He was 20 and needed money to start working up North after a long period of unemployment. He needed more along the lines of a $1000 but decided to get $3500.00. The credit he did has was horrible as he was financially inept so he needed a co-signer. I agreed on the condition that if after 6 months the payment history was good they would remove me. They agreed. That was in August and every month I made sure he made the payments. We had a nasty break up in March and he stopped making the payments. While the 6 months of good payment history had passed and I was off the loan as a co-signer. He vanished and the FI started calling me but they weren’t calling me for money they were calling me asking me how to get ahold of him. So I gave them everything I knew. This happened with about 4 other creditors. Thankfully I never co-signed anything else of his.
My fiance had co-signed for his girlfriends cell phone plan when they were 19. Well they broke up and he was left with a $1000 bill that was in Collections that he ended paying in order to save his credit.
I will never co-sign for anyone.
February 18, 2010 at 1:46 pm
My father co-signed on a loan for me to buy a car when I was in university and still living at home. It was a great opportunity for me to learn about debt and how to pay it off and manage my money responsibly. He took the time to explain what the consequences would be to him and his credit rating if I defaulted on the loan, and to explain how paying it off diligently would establish my credit rating.
In this case, it worked because my father was an authority figure in my life. It would be much more difficult to have these conversations with a brother or family member over whom you do not have authority. Clearly, a decision to make carefully!
February 18, 2010 at 1:59 pm
GREAT POST! My mom and dad never paid a bill late for their entire lives – in their 60s now. They have the best credit rating you’ve ever heard of. They cosigned a mortgage for my sister who consistently made late payments (not because she couldn’t pay but because she had the monthly due date wrong!) for several years and my mom’s credit rating was trashed. They didn’t discover the problem until they retired.
February 18, 2010 at 1:59 pm
My point is: don’t do it, folks!
February 18, 2010 at 1:59 pm
After some very bad experiences which destroyed friendships and caused enormous family stress we now live by the Gail policy – consider any financial help you give to be a gift. This of course was my know-it-all parent’s policy also and if we had listened 30 years ago we could easily have avoided all kinds of trouble and pain.
Nothing comes between people like money. Just go to the reading of a will! And after all the ‘Til Debt show is all about how money comes between couples.
When people who we care about ask us for help we consider what cash we can spare and give it as a gift – with absolutely no expectation of repayment. This of course limits the gift but that is also a good thing for us. We try to help in other ways and there have been cases when we did not give cash but rather bought groceries, gasoline and pet food or paid a hydro bill.
Having learned the hard way that you can never be prepared enough for emergencies in your own life (and that they often travel in packs) we have now adopted the policy that we will not put our financial health in jeopardy for anyone, anymore. We have no debts and are building savings but because of my health we cannot tie up our chance at credit if we should really need it.
We have recently refused to co-sign and that refusal is not going well. Oh well. Gail is right. If a co-signer is required then that person has not proven that they are able to handle the loan on their own and should redo their decision. Not involve others and take risk with someone else’s personal money. It really does not matter if the person is an actual saint in their lives and character because everyone’s good intentions have a way of paving the road to hell and believe it – no good deed goes unpunished.
This is not to say that one should not support family and friends. My parents helped us out with many “gifts’ which we felt was our duty to repay even though it was not expected. We were always very sincere but somehow they always ended up at the end of the line until we finally got serious about ALL debt.
We are doing the same but with much less resources available because of our bad past behaviour with money. I however am a lot more demanding than my Mom and Dad were. When I bought yet another pair of shoes they just clucked but did not lecture. Big mistake. When we met those who were in trouble and came to us for help driving around in a new car I did not hesitate to say – I guess you have now paid off all your debts and have a nice emergency fund for your kids. This of course pissed them off but from my own experience it took a lot of nagging guilt, embarrassment, shame and neck deep ca-ca to get me to change my evil ways so I see myself as one of those annoying reformed debtors who is just trying to speed up their rehabilitation process. Kinda fun to give ‘em the Gail “are ya stupid” or “are you kidding me?” looks but I have to learn not to giggle! If only experience came in a shampoo. Wet, lather, rinse. No need to repeat.
February 18, 2010 at 2:03 pm
I was once a student that was late applying for my government student loan so I went to a bank. They wouldn’t give me the loan without a co-signor. My parents didn’t have very good credit so I asked all my family, the only person that said yes was my cousin. Once I graduated, it was the first loan I paid off so that it wouldn’t be stuck on her credit history.
I was really grateful for her help because without it I may not have finished my degree – which TODAY is fully paid off! No more student loans!!!
February 18, 2010 at 2:12 pm
I would NEVER cosign a loan for anyone but I do have sort of a funny memory. My parents cosigned for a (I believe small) loan for their NEIGHBOUR down the road!! It sounds really dumb but I think she had just gone through a divorce in which EVERYTHING was in the husband’s name and she was then in her 40’s with no credit whatsoever and they felt like they wanted to (take the risk) in helping her.
Anyway, thankfully it all turned out fine and the loan was repaid and all was peachy but craziness!
February 18, 2010 at 2:26 pm
This is a hard one because most situations I agree should be no but my father co-signed a loan when I was in school (I didn’t qualify for gov’t loans because I worked part time and apparently $15K a year is enough to pay for life and about $6K in tuition and books). I had already had a credit card so I had credit of my own but I only qualified for a small limit and I needed the funds for 4 years or so of school.
It was the only school debt I had so once I finished I started paying it off with a plan to have it gone in 5 years. I got a bit of the debt fatigue Gail talks about and while I always made sure I paid the minimum so that both my and my father’s credit would be OK it wasn’t until he was diagnosed with cancer that it hit me the that there were serious repercussions to him co-signing. If he died before it got paid off the bank would have a claim against his estate and it would have become really messy. I paid the balance off in 1 year about 3 years ago and have enjoyed the lack of debt weight ever since.
February 18, 2010 at 2:29 pm
A note on building credit — It doesn’t take very long!! If someone asks you to cosign because they don’t have any credit encourage them to get a cc with a small amount of credit and start using it and paying the bill off in full at the end of every month.
That’s what I did when I was 18. I went to PC Financial to open an account and they refused me because I didn’t have any credit. The woman there encouraged me to get a credit card, use if for awhile and come back. I did; in less than 6 months and she remembered me and I can still remember how incredibly blown away she was at how in that short amount of time I went from having no credit to having excellent credit.
February 18, 2010 at 4:02 pm
What about credit cards?
I co-signed a CC(low limit) for my future BIL so he could buy the ring. The plan was to get a credit history and then cancel the card, and I know he was not using it after getting his own card. But I don’t think he has actually cancelled it, as that usually involves a lot of effort. The bank won’t give me any information about the card either.
Of course, they’ve broken up and although still friends, I don’t really feel like chasing him down.
Does anyone know how I can cancel this card, or at least get my name off of it?
February 18, 2010 at 4:09 pm
My experience is similar to Krista’s. When I decided to return to school for my Masters’ degree two years ago OSAP wouldn’t even cover my full tuition because I was continuing to work part-time while doing full-time studies. It doesn’t take a genius to see that working part-time, even though it was a good job, could cover the remainder of tuition, books, rent, food, etc. When I went to the bank to see about a STUDENT line of credit, because I didn’t make the $35000 I was before they wouldn’t let me get it without a co-signer. I had a great credit history but found myself having to ask my father if he’d co-sign. Said he’d rather “take care of it” than deal with the bank. This made me cringe. So I ended up sadly living off my Visa for most of that year. Now I’m working my arse off to pay it off and get back to where I was before… but I’m using the jars, budget, etc. and should be in a good spot soon.
February 18, 2010 at 5:35 pm
I agree student loans are the exception, simply because the government considers you an adult for everything except student loans. My parents co-signed a loan for an old boyfriend of mine. His parents were divorced, has tons of money, and continued to use him as a pawn in their fighting. He didn’t qualify for government loans, because his parents made too much money, and his parents wouldn’t give him any money for school (they were afraid he would use some of it on the other parent!). So my parents agreed to co-sign. Five years later, long after we broke up, they found a copy of the loan discharge notice stuffed in the mailbox. Obviously, never cosign for more than you can afford to lose!
In this case, however, you’d be a moron to co-sign. These are people who not only can’t pay their bills, but are so far behind they don’t qualify for a consolidation loan. If you insist on helping out for the sake of their kids, open an RESP in the kids names, or offer to pay one of their bills for them, so their credit rating improves. Either way, insist on seeing a full picture of their financial status before you help, and discover what steps they are taking to curb their spending and/or increase their income.
February 18, 2010 at 6:03 pm
The only way my parents contributed to my post-secondary education (B.A. and B.Ed) was to co-sign a loan for me. They did this for my other three siblings as well.
Once I was finished school, my now husband and I needed to purchase a car so that we could do supply work in the area (vast country area), and I had to get my mother to co-sign for the car! I had nothing to my name, and I was just out of school and had made no payments on my loan…
In any case, I have never defaulted on my loan; hell, I paid off my $25000 in 2.5 years and now they have more credit to expand my sister’s loan for another 4 years.
However, I can see how many MANY people have been screwed over by the ones they love. *sigh* It’s sad.
February 18, 2010 at 8:46 pm
As others have pointed out, young people with no credit rating would have a tough time without someone willing to place some faith in them. Obviously it’s a bad idea to cosign a loan for a person with a bad credit history, but for someone whose only financial crime is to have NO credit history, I don’t think it’s so simple. When I was starting out, I couldn’t even rent an apartment without my dad to cosign.
February 18, 2010 at 9:31 pm
Wow, I just went onto my library’s website to check the status of Gail’s new book… 70 holds! That’s insane lol
Gail, I hope your sales are doing well, it looks like everyone is taking your advice to heart and not spending money to buy it
Guess I’ve got a bit of a wait until it’s my turn…
February 18, 2010 at 10:49 pm
I think there are certain exceptions, as has been aptly noted above. But what do those people who’ve asked someone to co-sign do to protect them? My mother co-signed most of my law school loans, and even though I’m single with no dependents and don’t otherwise need life insurance, I have enough life insurance for my mom to pay the loan in full, and I’m looking into disability insurance so that payments can be made in the event I’m unable to work. In the interim, I’ve made all payments on time and am actively trying to accelerate my payments to pay them off even sooner. I know my mom agreed to take on that responsibility, but lord knows I don’t want her to, and I’m doing my best to make sure that it doesn’t happen.
February 18, 2010 at 11:10 pm
I was fortunate enough that my parents believed in me to co sign my first loan. Of course, in a small town, there isn’t much choice. AS Gail mentioned, my parents got lucky with me. I worked full time and 1 or 2 part time jobs to make all ends meet including this loan. I had to learn to earn. Fast forward many years and my step daughter was asking us to co-sign for a vehicle. I told my hubby that he better have that money available each month to make the payment. I hadn’t seen much responsible actions from her to that point. Hubby declined to her, telling her the truth – he himself was not likely able to qualify for the loan since he’s on unpaid medical leave. And since I’m the breadwinner of the family making all our payments, I wasn’t able to help either. All the truth -but also I just didn’t trust her. Had we co-signed, I would have insisted our names on the title of the vehicle with a written understanding that if more that 1 payment was missed, the vehicle would be in our driveway, not hers. She and her bf just hadn’t learned to earn. Changing jobs, mainly part time low paying positions, on a frequent basis. Then being very fussy about what to do or where they want to work. He has precious little experience but wants a wage over $20/hour. Hmmm. Nope, not going into their debt too.
February 18, 2010 at 11:11 pm
We purchased our first home in 1974 with a loan of $500.00 for the downpayment from my aunt. Yes, homes were much cheaper then. When you were making $7,200.00 per year…it all equaled out. If my aunt had not done this, not sure when we would have been able to buy. We had one child and another on the way. It was very small – a two bedroom – two rooms down, two bedrooms and a bathroom up…but it would be ours. We paid back the $500.00 with interest. I mentioned this to my aunt last year right before she died. Thanking her for doing that for us. She didn’t even remember!
Hubby co-signed a loan for our daughter for schooling. She is paying it off methodically and has not missed a payment. Hope that continues!
February 18, 2010 at 11:53 pm
This is an interesting post and a topic I am grappling with at the moment. I am currently married but may be separating from my husband in the next year or so. I’m hoping – if it goes ahead – that it will be an amicable separation – although still very very sad. I thought that we might separate a while ago and so when I was at our bank I asked about having a line of credit – my own line of credit or some kind of loan. I was told that if I wanted that I would need to get it co-signed by my husband. This surprised me as we own our house outright and my name is on the deeds along with my husband’s. The reason I enquired about some kind of loan was because I’m in school part-time at the moment and don’t qualify for any loans as my husband earns way too much. I earn very little – I moved to Canada 8 years ago for my husband’s job and, whilst I eventually found employment, I then later had to change direction as my health was affected – hence the return to school for a new qualification which I hope will help me get another job (I have another couple of years of p/t study to complete it). So I feel a bit stuck if we do go ahead with the separation – I don’t like the idea of asking my husband to co-sign (altho’ I think he would) and I don’t understand why the bank wouldn’t take the property I part-own into consideration – my husband will have to buy me out or give me some money for that ownership. At the moment my plan is to work my butt off this summer with summer work if I can get it and hope that something can be resolved before I’m due to return to school in the Fall. And there is no one else I can ask for help financially – which isn’t something I’m comfortable doing anyway. I wonder whether I should have gone to another bank and asked for a 2nd opinion with respect to getting a loan? Any thoughts appreciated. BTW at the moment I get a couple of small scholarships to pay part of my school fees and then the rest is paid from the small allowance my husband gives me every month – I pay back bit by bit as I can – so I live on very little at present but shelter and food is something my husband pays for at the moment but which I will be responsible for in the future. I find all this rather scarey particularly as I’m in my 40’s.
February 19, 2010 at 8:10 am
You are doing your children/step-children no favour by co-signing or loaning them money in your name – the result is hurt feelings, resentment, and serves nothing to help them become financially independent – we learned the hard way.
February 19, 2010 at 10:06 am
@ Angela -yes absolutely get a second opinion, can’t hurt. Also simply owning property doesn’t necessarily mean anything in and of itself. Do you have your own credit history? Consider getting a credit card in your name only (mention it to your husband, he’ll find out anyway and sounds like a decent guy) to build your own history.
February 19, 2010 at 10:57 am
Thanks Geoff – I will do that. Yes I do have a credit card and pay off the balance every month – so I have a good credit history. That’s why I was so surprised at the bank’s response (it was the green bank!) – I have a number of accounts with them – an individual chequing account which always has money in it (never gone overdrawn) and a joint account with my husband which has a lot of money in it as well. When we moved to Canada we actually had a line of credit to help us pay off our house as well as it was such a small amount we didn’t need a mortgage – and that all got paid off pretty quickly. So although I don’t have much income at the moment I do have half a house and a good credit record.
February 19, 2010 at 6:26 pm
I can truly say that I was a stupid irresponsible young adult who didn’t pay my student loan that my dad co-signed for me. So if anyone needs an example of why not to co-sign for someone, I am it (since I do not see many more like mine)!!
My dad is a very very generous person who has excellent credit and is willing to do anything for his kids. In my late teens my dad co-signed for me for a car, we packed up the family and I picked out a 1990 turquoise sundance…my very first car, wohoo the freedom.
Well fortunately for him, I paid that sucker off.
Since he had a great experience the first time he figured he would be willing to do it again when I was about 21. I went to him because OSAP would not give me very much money with regards to a student loan. So we went to the bank and he co-signed a $5000 loan for me (which I just squander on nothing by the way). Well at the time I racked up $6000 on 5 credit cards and couldn’t pay the interest on the loan that was required. Stupid Stupid Stupid…..
The bank came to him about 3 months later after many missed payments and said that we want the $5000 and we want it now! The disappointment my father had on his face when he told me gave me a wake up call. He put the $5000 on his line of credit and I went to a non-profit credit counsellor to help me pay off the huge credit card debt hanging over me.
It took me three years to pay off my dad with interest, and the credit card debt…..
Now 29, I have not had any credit issues since that day my dad spoke to me and I refuse to have any in the future. My husband and I have a mortgage, no consumer debt, good savings, TFSA, and RRSP’s….needless to say, I’ve learned my lesson!
February 20, 2010 at 6:28 pm
We have never been asked to co-sign for a loan, but we would not do it for any of the nieces and nephews. Just watch Judge Judy or any of the other court shows to see what often happens in the US when the primary signatory goes into default and the co-signor is left holding the bag. It can really put a smile on a lawyer’s face.
February 22, 2010 at 6:25 pm
Yep – cosigning is almost always a bad idea. A cousin of mine who has been chronically underemployed and has psychological problems asked me to cosign on her student loan, emphasizing to me that “I wouldn’t have to pay anything, just sign for her.” Well I knew better, and I told her no. My dad got suckered into it, and sure enough after a few months she dropped out of school and never made any payments on the loan. Collections came after him, his credit was ruined, after a lifetime of stellar credit and financial rectitude. Now all their credit is in my mom’s name because he can’t get a credit card. So much for wanting to be the hero!
August 17, 2011 at 4:24 pm
My father co-signed my car when I was 21 and i never would let him down. I would always pay my car payments regardless of how much of a struggle i had. It was a good learning experience for me in terms of learning about how to pay debt. I never really actually thought about his credit rating and how it could hurt his rating, at that time i guess i didn’t know too much about that! but i knew for sure i would never default because well that’s the way i am
fast forward later now i am post secondary educated, have a car fully paid off in only 3 years, 20k worth of savings, 0 debt
my father really taught me something!
but i would never ever cosign with anyone unless it’s my own kids or wife
i actually had a friend that i met in school ask me back in jan to cosign with her and her bf for their car…… i said hell no ! frankly i don’t think she really was a good friend to begin with … because friends don’t ask that of each other
since that time i refused i never spoke to her much…. some sort of so called friend that was eh?