Why You Should Avoid Co-signing For a Loan

Debt is definitely the American way. We are used to taking out loans on anything and everything we deem necessary. While I normally talk about you staying of debt, today I want to talk about avoiding the trap of co-signing for someone else on a loan.

What does it mean to co-sign? It happens when a person who is applying for a loan (car loan, mortgage, student loan, credit cards, etc.), can not secure the credit based on their credit history and their financial situation. The bank needs a third party to enter the transaction to provide them with further assurance that the loan will be repaid.

Unfortunately, we can be tempted to “help” a friend or relative in a time of need by co-signing on a loan for them. We may think that they just need a bit of help. But think about this: banks are in the business of making loans and gaining profit via charged interest. They will loan money  to pretty much anyone for anything. Yet, the bank has deemed your friend or relative unworthy of extending credit. Yet, you think somehow that you know better.

Here are the consequences of yielding to the temptation of trying to help someone by co-signing:

  • You will harm instead of help your friend/relative. They are in no position to borrow money and you are providing a false sense of security and hope by facilitating their bondage to debt.
  • Your friend or relative will not pay the loan. The bank knows this and that’s why they needed you to be a part of this.
  • Your credit will be affected when your friend/relative is late with payments and when payments stop completely.
  • The bank will come after you for the money. By co-signing, you provided a guarantee of payment. You are now liable for the debt.
  • You will most likely lose the relationship with your friend/relative. Lending money to friends or relatives rarely ends well.

Don’t fall into the trap of co-signing. If you have the financial ability to help, help your friend/relative by giving them the money. If you can’t give them money, help them with knowledge on how to get their finances in order. Buy them a book or pay for a class for them. Do not harm them further in a misguided attempt to help them.

My child, if you have put up security for a friend’s debt or agreed to guarantee the debt of a stranger—
2 if you have trapped yourself by your agreement and are caught by what you said –
3 follow my advice and save yourself, for you have placed yourself at your friend’s mercy. Now swallow your pride; go and beg to have your name erased.
4 Don’t put it off; do it now! Don’t rest until you do.
5 Save yourself like a gazelle escaping from a hunter,like a bird fleeing from a net.

Proverbs 6:1-5 (NLT)

Presione aquí para la versión de este artículo en Español.