Why You Should Never Co-sign For a Loan

Recently, a past client contacted me to see if he could refinance his house. We looked at all the numbers and it seemed to make sense. The only problem was his credit. Not quite exactly his credit per se, but the co-signed loan on his credit. The infraction coming of course from his own daughter.

My client had co-signed for a vehicle purchase for his daughter a few years ago. This past year she has been having some problems making timely payments. He knew there were some issues but was really upset when he realized the extent of it and how it had wrecked his own credit. Now, the father and daughter are not speaking to each other.

However way you look at it, co-signing a loan is a bad idea. Even the Good Book advises us to stay away from putting up “security” for another man (Proverbs 27). It doesn’t matter if you’re related or in-love, at the end of the day relationships can be severely tested by this simple act of “compassion”.

From the bank’s perspective, if you co-sign, you’re telling them you’ll cover for the other party. That is why you have to understand why you’re being asked for this favor. Essentially, the bank has determined that the person in question is not credit worthy. They view this borrower to be too risky and do not believe will be able to pay the loan back. Banks usually know a little bit more about this kind of risk analysis than most.

Think of co-signing this way. When you co-sign you’re agreeing to take the loan and then hand the cash over to the person you’re singing for. In exchange you’re telling the bank that you’ll pay if that other person won’t. So, the bank lends the money based on your credit and also knowing the other person is too big of a risk. Basically, in the banks eyes, you’re the borrower.

I know of several situations where co-signed transaction have been led to very difficult situations. So, my advice to everyone is to never co-sign.

If this hasn’t been convincing enough, consider this. If the person you co-signed for declares bankruptcy, you’re still on the hook for the loan. Legally the other person is completely free from the debt. So, not only is your credit shot, legally, in a court of law you’ll be required to pay the bank back! Not quite what you had in mind when you extended a helping hand.

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