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,” 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.
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?
*Photo courtesy of The Kirbster