Cosigning on a Loan: To Be, or Not to Be? That is the Question.

Should I Cosign on a Loan?

Cosigning on a Loan: To Be, or Not to Be?
Cosigning on a Loan: To Be, or Not to Be?

This is a question many people ask themselves on a regular basis. Or, rather, a question that others ask many people on a regular basis.

Given the fact that fully 47% of Americans don’t have enough cash to cover a $400 emergency, this is no big surprise.

We’ve become a nation that has gotten comfortable with living off of credit. With not having an emergency fund. With not building wealth or contributing enough to retirement funds.

“It’ll all work out eventually,”Β they tell themselves. I know this because we told ourselves that for years. Until we got to the point that it couldn’t “work itself” out anymore and we had to start working it out and taking responsibility for our financial situation.

So then, when the screws get tightened, when they run out of available credit, when the payment amounts start to get too uncomfortable, they come to you for help.

“Will you cosign a loan for me?” they ask.

And you start to get that icky feeling in your stomach. The “I know I probably shouldn’t be doing this but I’m afraid to say ‘no'” feeling.

So what’s so bad about cosigning on a loan for somebody? I think most of us know what the risks are, so today I’m going to go into a few of the reasons you probably should say no to cosigning, and a few things you might want to keep in mind if you decide to say “yes” and cosign on a loan for somebody.

Personally, I’m not a huge fan of cosigning on a loan for others, but I can see where exceptions can be made, so I’m approaching my thoughts from that standpoint.

You Probably Shouldn’t Cosign on that Loan if…..

1. You Can’t Afford to Lose That Money

I’m a firm believer that anytime you are considering cosigning on a loan, you need to go into it with the attitude that you will be paying back that money yourself. Why? Because if you assume the loan will be your responsibility and that the primary borrower will default, you won’t be as ticked off if they do default. If you’re choosing to cosign on a loan, go into it with a “gift” attitude instead of a “I’m sure they’ll pay it back” attitude.

The sooner you let go of that money, the less impact a default by the primary borrower will have on you and your relationship with that person.

Which brings me to my next point.

You probably shouldn’t cosign if…..

2. You Have Concerns About Each Others’ Ability to Forgive and Let it Go

If the person who wants you to cosign on a loan isn’t a person you can be totally honest with – and vice versa – and if you think the elephant in the room (the loan) has the potential to destroy your relationship with that person, you might want to avoid cosigning on a loan with them.

Money and money issues destroy relationships every day. And while you saying “no” to cosigning for a loved one might tick them off in the beginning, I’m willing to bet that the relationship would be in a more serious state of disrepair if you said “yes” and then they defaulted on the loan.

3. You Have Concerns About the Person’s Character

If the person who is asking you to cosign for them has a history of not paying bills, paying bills late, shirking responsibility at work and other places, etc., I’d think seriously about not cosigning on that loan.

Recommended Reading: Why Didn’t They Teach Me This in School?: 99 Personal Money Management Principles to Live By

The person asking you to cosign may be someone you care about deeply, but that doesn’t necessarily mean they’re responsible enough to handle a loan.

On the other hand, if the person asking you to cosign has shown a long history of living with integrity, keeping their word and owning up to their obligations no matter what the cost (no pun intended) then cosigning on a loan for them may be worth considering.

4. You Have Concerns About the Purpose of the Loan or the Amount of the Purchase

For instance, let’s say that your daughter needs a car. She has no credit history so she asks you to cosign on a loan so she can buy a brand new Ford Mustang. Instead of putting yourself on the line for $35,000+, it might be a wise idea to offer to sign for a $5,000 or $10,000 reliable used car instead. This way you’re helping to lessen the financial burden on your daughter and on yourself, yet you’re still helping her out. Helping loved ones to avoid huge money mistakes (when you’re asked) is part of being a good friend/loved one.

Now we’re going to cover the other side of the coin:

Things to Consider if You Do Decide to Cosign

So, you’ve made up your mind and there’s no convincing you otherwise: you’re going to cosign the loan for the friend or family member who has asked you. Here are some things to keep in mind.

1. Get a Written and Signed Contract

It doesn’t have to be formal and expensive with lawyers involved. Simply type something specific up on the computer (google ‘loan contract examples’ for ideas) or use a free or inexpensive legal document source found online or in a store like Office Depot.

Add the specific details such as:

  • Loan amount
  • Monthly payment amount
  • Interest rate that will be charged
  • Begin date of repayment, number of payments and end date of repayment

Be sure to have both parties sign it in the presence of a witness such as a notary public or other non-interest party. A written contract will make the terms clear and give the borrower an extra sense of responsibility about paying the loan on time. Having a witness view the contract signing will also give the primary borrower added accountability.

2. Be Prepared to and Okay with Losing the Money

If you’re not or can’t, please reconsider. It’s not worth losing your relationship with this person – and your hard-earned cash – due to a default. If you go into it from the get go not expecting the money back, you’ll be in a much better place.

3. Be Sure That You Can Handle the Financial Burden Yourself

Before cosigning on a loan it’s important to be sure that you can comfortably (as in, without affecting your current lifestyle) afford taking over the payments on the loan if need be. You don’t want to put yourself into financial ruin due to cosigning on a loan. Go over your finances thoroughly to be sure you can afford the burden of the extra payment on the cosigned loan if default by the primary borrower occurs.

4. Be Clear That You Expect the Money to be Paid Back

It’s important to be clear with the primary borrower (without being a jerk) that you need to have the money back. Even if you don’t technically “need” it back, you don’t want to give that impression to the primary borrower.

Just make sure to clearly state that you expect the money paid back as agreed.

5. Hold the Primary Borrower Accountable

If something happens where the primary borrower isn’t or can’t make the payments on the loan, it’s important to address the problem as soon as possible and work together with the primary borrower to make an action plan. It could be that they just need help budgeting or learning how to cut expenses. Help where you can in a polite and encouraging way that will help both you and the primary borrower to be sure the plan is carried out.

6. Remember that it’s Only Money

In the end, money is just money. It’s just a tool that has no true value in life. People and relationships are far superior in value than any amount of money ever could be. The sooner you choose to avoid idolatry of money in general, the less of an impact the cosigned loan will have on your life – whether or not it’s paid back.

Have you ever cosigned for a loan before or asked someone to cosign for you? What lessons did you learn from the experience?Β 

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*Photo courtesy of The Kirbster

34 comments

  1. Kathy says:

    There’s a reason the bank won’t give a person a loan on his own merits. He/she is determined not to be a good risk. If the bank doesn’t think they are trustworthy, should you? If you are prepared to consider the ultimate payment you end up making to be a gift and are ok with that, fine. But you might be on the hook for years and years of payments depending on what the loan is for.

  2. This is something many parents will have to decide as their kids head to college. I personally would have trouble NOT cosigning loans for my kid if it was for school, but I know some people are uncomfortable cosigning ANY loans. I can’t blame them.

    • Laurie says:

      I think it depends a lot on the kid’s character too. If the kid has a history of starting and not finishing stuff, I’d be hesitant to sign a school loan for them as well. Great comment, DC!

  3. My inclination would always be to say no. I don’t even like loaning out money (no not talking about $5 here or there). I just think in the end it risks the relationship, and honestly, unless a person is starving or living on the street, it kind of teaches them to find a way to make it through whatever situation they are in. Tough love if you will.

    • Laurie says:

      I so agree about the tough love thing. Often times when we’re asked to lend money, we’ll say no but offer to help them learn to budget and learn how to establish a regular savings habit. That suggestion doesn’t usually fly, which ends up making us extra glad we didn’t borrow the parties money. πŸ™‚

  4. My parent did for me on a used car when I was 22. I paid it in full. If my kids asked me today to co-sign I’d really have to sit down and discuss alternatives with them. I want to make sure they have a true understanding of what they were signing and why they needed the money right away. I don’t think I would ever consider it for anyone else.

    • Laurie says:

      “I want to make sure they have a true understanding of what they were signing and why they needed the money right away.” I hear you. When I was about 21 or so, I really needed a car to get to work. I found a 1981 Mustang (7 yr old car at the time) in terrific shape for 3k. My mom cosigned on the loan and I made sure to never let her down by paying on it faithfully.

  5. Josh says:

    I was always told to only borrow money if you were prepared to never see it again. #2 on your list & that helps me decide limits to what I will lend out for money, tools, etc.

    My parents co-signed college loans for my brother & myself. With all the regulations introduced since I graduated in 2008, I don’t even know if this is still possible.

    They would have co-signed my first car loan if needed too. Of course I had a job & wasn’t a wastecase so they didn’t hesitate. If the circumstances were different, I think they would only co-sign for a cheaper automobile ($10-15,000) not a brand new one like I had purchased.

    • Laurie says:

      I think it was your integrity that really made the difference. I would absolutely cosign for my kids if they met certain parameters. Seems to me your parents knew they raised you well, and you confirmed that for them by paying on the loans as promised. Great work. πŸ™‚

  6. Kalie @ Pretend to Be Poor says:

    These are great points to consider in such a decision, Laurie. I couldn’t agree more than with co-signing a loan, or making a personal loan, you have to go in assuming you will absorb the cost, rather than denying the possibility that things could go sour. If you can accept that, and feel that the person is generally responsible and making a responsible choice with the money, I think it becomes a personal preference rather an a right-or-wrong situation.

    • Laurie says:

      Love what you said about denying the possibility that things could go sour. I think many people enter into a cosigning deal with that denial, and that’s where things get complicated. And so true about it being a personal preference. Go ahead and cosign if you want, just make sure you know what you’re truly signing up for, so to speak. πŸ™‚

  7. The first point is probably the most important one. If you can’t afford to lose that money, you probably shouldn’t co-sign. There have been too many instances where the co-signer has been stuck with the bill and friendships have been ruined. Understandably it is hard to say no to loved ones when they ask for a co-signer. It is a tough situation.

    • Laurie says:

      So true, Andrew. We’ve had to say no to relatives before. We just try and make it about us rather than about them. I would hate to lose a relationship over something as simple as money.

  8. Mr. SSC says:

    When I got my first big paying job out of grad school, it wasn’t 3 months until my sister asked for a loan. Our dad had recently passed and since he was her defacto ATM, I decided I wasn’t taking on that role. Like you said, I told her the terms, monthly payments, interest rate, and that she would have to sign a legal document that stated everything above. Needless to say, she decided not to take the loan, and I never got asked for money again… πŸ™‚

    Agreed, if you can’t lose the money, and you don’t feel goos about the use or situation with the lender, it’s best to politely decline and save yourself the hassle.

  9. Dianne says:

    My parents came to me for a loan. I jumped to help, because the money was to pay for surgery (my mom had breast cancer – my dad was disabled in a wheelchair). I didn’t want them to pay me back, but they insisted. I didn’t want the money. I wanted the blessing of helping my loving parents. They’re both gone now.

    So, it’s true. What the loan is for and who is asking for the loan are important.

    • Laurie says:

      What a wonderful story of love, Dianne. Good for you for doing that for them. They are blessed to have a wonderful daughter!

  10. We had to cosign on our daughter’s lease when she moved out to be closer to her university and track training. We made our expectations clear, and she knows from experience that we won’t bail her out if she runs into a financial problem. I can’t imagine another circumstance that would lead me to cosign. I’m with you on avoiding it.

    • Laurie says:

      “she knows from experience that we won’t bail her out if she runs into a financial problem”. That is SO important, Ruth – great job!!! If kids (and adults) know they’ll be bailed out, they’ll likely just repeat the irresponsible behavior. It’s super tough to stick to your guns, especially when dealing with loved ones like children, but you’ll be doing them a favor in the long run if you let them learn from their mistakes.

  11. I like point number 6. “Remember that it’s Only Money” and this connects with the point of “Be Prepared to and Okay with Losing the Money” ’cause if you’re cosigning for someone I guess is someone you trust and not the first person that ask you to do so.
    So, you made me just think: if you’re prepared to loose the money (it’s because you have it, right?) so why don’t you become the lender, charge a certain % on it and then every body happy, you earn something, your friend earns something and at the end if he defaults you loose it (you were going to loose it any way).

    Cheers, great article.
    Erik

  12. I have to assess the person’s capability to pay and his character itself because if I dont and something goes wrong, I would be in debt, in replace of him. It is too risky! So, I think it’s really advantageous that I am so vocal on the ground that I am not open to cosigning so that my friends would know this side of me.

  13. Kalen Bruce says:

    I think you bring up a good point here, Laurie. Most financial writers just say “NO, don’t do it! Ever!” And I have been guilty of having this mindset, but I like that you actually gave some advice for what to do if you do cosign. This also helps those who realize it was a bad idea now, but they’ve already done it. And of course, the big debate over cosigning for our kids or not. That’s the only exception I would make for a cosign. Great perspective!

    • Laurie says:

      Thanks so much, Kalen! Yes, it’s definitely about individual choice, but so important to be fully aware of what you’re getting into before you do it.

  14. Jayleen says:

    We learned early in our marriage not to lend money. We didn’t co-sign but my husband ‘sold’ his car to a friend with the agreement on a monthly payment. We received three payments and that was it. The friend moved away and pretty much had a free car.

    When our kids are a bit older and needing help, I’m sure we will consider the circumstances and do our best to help!

    Very thought provoking, Laurie!

  15. I’m not exactly how I feel about cosigning a loan. I think it depends on the particular person involved and like an above commenter said, it can really benefit that specific person and lead their life into a direction that they need.

    • Laurie says:

      So true. This is why it’s so vital to think carefully before cosigning. In some instances, it can be highly beneficial to the parties involved. In others, not so much.

  16. Jamie says:

    It’s a yes and a no, depending on the person Laurie. But, as much as possible, I don’t cosign as it is just a stress to me whenever I cosign. LOL

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