Most people who don’t work in the lending industry have something of a benign view of co-signing a loan. There’s a tendency to think that we’re doing something nice to help a family member or a friend get a loan to buy a home or a car or something they truly need. It’s an act of generosity.
That may be our intention, but the end result and what’s actually happening are something quite a bit different.
The risks of co-signing
When you co-sign a loan for someone the happiest time is the day they get the loan. The person you’re co-signing for is happy because they’re getting a loan, and therefore the house or car they want. You’re happy because they’re happy and because you’ve done something very generous.
That’s as good as it gets.
Once the loan is in affect, the risks take over. What risks?
If the primary borrower defaults on the loan, you will be required to make good on it. The bank is relying on your guarantee of the loan as the basis for granting it. And they will collect from you if for any reason the primary borrower can’t service the loan.
When you co-sign a loan for someone, you put the person you’re signing for and yourself at risk.
Co-signing in the Bible
The Bible doesn’t declare borrowing money to be a sin, but it does give strong and repeated recommendations against it. At a minimum, debt has the capacity to take our attention and efforts away from God, which is never a healthy arrangement.
In Proverbs we read:
Do not be one who shakes hands in pledge or puts up security for debts;
if you lack the means to pay, your very bed will be snatched from under you.”—Proverbs 22:26-27
The verse doesn’t deal specifically with co-signing, but it does refer to “pledge”, which is your oath, and “puts up security”, which is exactly what co-signing a loan is—to the lender.
We’re being warned that we’d better be prepared to pay or their will be consequences, and again, that’s a real possibility when we co-sign loans.
Co-signing loans and your credit report
Here’s a point a lot of people aren’t entirely clear on: when you co-sign a loan for another person that loan will appear on your credit report. And there’s more.
Any late payments on the loan by the primary borrower will show up as late payments on your credit report as well. If the primary borrower defaults on the loan, that will also appear on your credit report. Even if you ultimately payoff the loan for the primary borrower, any derogatory information will still appear on your credit report.
Yes, the loan was primarily the responsibility of the primary borrower, and yes, the primary borrower was the one who made the late payments—not you—but the loan is still in your name and anything that goes wrong on it will appear on your credit report.
As much we might see and believe that co-signing a loan for a family member or close friend is a casual arrangement, the lending universe sees it in a much different light. It’s a formal arrangement in which not only are you enabling a loved one to get a loan, but you’re also pledging to make good on that loan if the loved one doesn’t.
A better way to help a friend or family member
If you think about what’s happening when you co-sign a loan for someone, what you’re really doing is helping them get into debt. Is that really what you want to do? You’re also getting yourself potentially deeper in debt and that’s something that should never be taken lightly.
If you need to co-sign a loan for someone it’s primarily because they can’t qualify out of their own resources. That’s a strong indication that they may be over-extended.
Yes, they may need help, but maybe co-signing a loan isn’t the best course of action for either them or for you.
Instead offer the following:
- Recommend that they buy something less expensive, something they can buy without a loan, like a less expensive car
- Recommend that they wait until they can buy what they want with cash, and by doing this you will be giving them your counsel that debt is something to be avoided
- Recommend that they wait to buy what it is that they want until they can get the loan on their own—at that point the risk to both you and them will be much less
- Offer to lend them money directly—if you don’t feel comfortable doing that then you shouldn’t co-sign a loan for them for all the same reasons!
One of the best forms of advice we can give our loved ones it to steer them away from debt. That will be better with them, better with us, and better with God.
Have you ever co-signed a loan and wished you hadn’t?