Many people gladly cosign a loan thinking they are doing the right thing by helping someone out of a difficult situation. Cosigners are usually friends or relatives who sign loan papers for someone who’s not able to get a loan on their own merit.
It seems like a good idea at first. You may be trying to help your daughter or son go to college. You may be assisting someone who is trying to purchase a home. Or maybe your brother needs to replace his car. Whatever the reason, cosigning is always done with the best of intentions.
You may think your only responsibility is to sign the paperwork and as long as they pay the loan back everything should be great, right?
When you cosign you are agreeing to pay the loan in full if the person you cosigned for does not pay. You are legally responsible for the debt. By co-signing, you have promised to pay off the entire loan if the borrower does not pay.
Cosigning is required by a lending institution when a person applies for a loan and their credit score and credit history indicate they are a poor loan risk. The lending institution requires a cosigner to guarantee the loan. In other words, the lending institution with millions or billions of dollars in assets will not risk making the loan because they do not think the borrower can pay back the loan.
When you cosign you become fully responsible to pay the loan if the original borrower cannot do so. If the borrower makes late payments or does not make payments per the loan agreement, it is reported on YOUR credit report. You are risking what ever assets you have to guarantee the loan for which you are cosigning.
Therefore, if the borrower pays 30 days late, the late payment appears on your credit report. Your credit report will get a negative hit and your credit score will be affected. One thing most people do not consider when they are co-signing is that if the borrower defaults, your credit could be affected for at least seven years.
Cosigning means you get all the problems that come with debt and none of the benefits since you do not have possession of whatever the person bought. Your daughter or son may have a college education and your friend may have a house and your brother may have a car but you have the debt.
Proverbs 17:18 says “Senseless is the man who gives his hand in pledge and who becomes surety for his neighbor.” The Bible is telling us that we have no sense if we cosign.
The statistical truth supports the Bible. Rather than the original borrower paying their own loan, you, the cosigner will most likely end up paying for the loan. If you agree to cosign someone else’s loan, statistically the odds are against you. Various sources indicate the borrower defaults on approximately 75% of cosigned loans so before cosigning a loan you should think twice. In the end, you will be grateful you took the time to think about it.
Bankrate.com defines the following top ten reasons to avoid cosigning:
- All the risk, very little reward
- The lender will sue you first if payments are not made
- You may need to sue the other responsible party if payments are not made and you get sued
- The person you help will be happy, but you have a lot to lose
- Cosigning and financial issues can destroy friendships or family relationships
- You are 100 percent liable for the loan and it could be a significant amount
- You could face tax consequences if the debt is settled
- If you need a loan, the cosigned debt on your credit report may have a negative on the approval of your loan
- You are fully responsible to make the loan payments if your co-signer defaults
- To ensure protection you need to monitor the payments your cosigner makes
Cosigning means you are paying on something you don’t own, the relationship with the other person has probably been ruined, your credit has been wrecked and your financial future is in jeopardy through something you could not control. Doesn’t really sound like a very good deal, does it?
If you’re considering co-signing, think about this verse from Sirach 29:17 “Going surety has ruined many who were prosperous and tossed them about like waves of the sea.”
Cosigning can be very dangerous to your financial health.