Myth: By cosigning a loan, I am helping a friend or relative.
Truth: Be ready to repay the loan.
The bank wants a cosigner for a reason—they don't expect the friend or relative to pay.
If debt is the most aggressively marketed product in our culture today, if lenders must meet sales quotas for "loan production," if lenders can project the likelihood of a loan going into default with unbelievable accuracy—if all these things are true and the lending industry has denied your friend or relative a loan, there is little doubt the potential borrower is trouble just looking for a place to happen. Yet people across America make the very unwise (yes, dumb) decision to cosign for someone else every day.
Why We Sign
The lender requires a cosigner because there is a very high statistical chance that the applicant won't pay. So why do we appoint ourselves as the generous, all-knowing, benevolent helper to override the judgment of an industry that is foaming at the mouth to lend money, and yet has deemed your friend or relative a deadbeat looking for a place to fail, or at least a loan default looking for a new home? Why do we cosign knowing full well the inherent problems?
Avoid the traps and manage your money the right way with Financial Peace University.
We enter this ridiculous situation only on emotion. Intellect could not take us on this ride. We "know" they will pay because we "know" them. Wrong. Parents cosign for a young couple to buy a home. Why do they need a cosigner? Because they couldn't afford the home! Parents cosign for a teenager to buy a car. Why would parents do this? "So he can learn to be responsible." No, what the teenager has learned is: if you can't pay for something, buy it anyway.
If You Sign...
The sad thing is that those of us who have cosigned loans know how they end up. We end up paying them but only after our credit is damaged or ruined.
If you cosign for a car, the lender will not contact you when the loan is paid late every month, but your credit is damaged every month. The lender will not contact you before they repossess the car, but you now have a repo on your credit report. They will contact you to pay the difference between the debt and the below-wholesale repo price they got for the car, which is called a deficit. If the lender did contact you, there is nothing you can legally do to force the sale of the car, because you don't own it; you are merely on the hook for the debt. When you cosign on a house you will get the same results.
According to Proverbs 17:18, "It's stupid to guarantee someone else's loan" (CEV). That pretty well sums it up. Just like trying to bless a loved one with a loan, many people are trying to help by cosigning, and the result is damaged credit and damaged or destroyed relationships. If you truly want to help someone, give money. If you don't have it, then don't sign up to pay it—because you likely will.
Find out the full truth about debt—plus learn how to take complete control of your money—with Financial Peace University.
Did you find this article helpful? Share it!
About the author
Ramsey Solutions