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Should I Cosign...Are You Kidding?
by Keith Rawlinson
Volunteer Budget Counselor
I'm often asked if it is okay to cosign for a family member
or friend. My answer to this question is always the
Are you kidding?
Consider the fact that the only reason the lender is requiring a
cosigner in the first place, is because the information submitted in
the borrower's application shows that statistically they will be unable
to repay the money. Whether it is a bank, credit union, car
dealer or landlord, they have experience in the area of finance.
And in the case of banks and credit unions, they have a lot
experience in the area of finance, especially in the area of lending
money. They have computers that calculate whether or not
is eligible for a loan. They have staff whose job it is to
determine whether or not a particular borrower will be able to repay a
loan. They know all of the statistics relating to lending
They have all of the knowledge they have gained from making
thousands and thousands of loans. And, with all of these
resources at their disposal, they have determined that the person
wanting to borrow the money will fail to repay the loan, and
therefore must have a
cosigner. So, you decide to step in and cosign for this
Do you really
know what a cosigner is?
A cosigner is a person who is able to qualify for the loan that the
other person cannot, and signs for the loan along with the original
borrower. What this actually means is that, legally, the
has borrowed the money just as much as the original borrower has.
In other words if you cosign, it is just as if you had
the money yourself--there is legally no significant difference
means that if the loan is not repaid, you can be sued, you can be
foreclosed upon, your wages can be garnished, your credit rating can be
trashed, and your name can be turned over to debt collectors.
You signed for the loan, so they can legally do all of these
things and more if the loan is not repaid. Usually, they will
first try to collect from the original borrower, but if the original
borrower will not, or cannot pay, you
will have to.
Now, think about what I said before: all of the resources of
lender say that the person borrowing the money will eventually default
on the loan (not pay). And statistically, this is exactly
happens much of the time. These lenders do this for a living.
They do this for profit. They are not stupid enough
expect this person to repay the loan, so they require a
cosigner--someone who is foolish enough to take the risk the lender is
not willing to take. The word "foolish" fits the situation
well. It is highly risky and extremely foolish to cosign on
anything for anyone, family member or not. Cosigning being a
really, really bad idea is nothing new. The foolishness of
cosigning has been known for thousands of years. Yes, thousands.
Consider this proerb written thousands of years ago:
"A person devoid of
understanding shakes hands in a pledge and cosigns for a friend."
The term "devoid of understanding" is a polite way of saying "stupid." So, what this proverb actually says is:
"A stupid person cosigns."
Should you cosign? Well, that depends...are you stupid?
What will most
likely happen when you cosign?
Why is it so stupid to cosign? Well, let me first tell you
statistics, and my experience as a Budget Counselor, show will happen.
Someone wants to borrow money, but his financial situation is
bad that the lenders have calculated that he is a high risk and will
not repay the loan. If he wants to get the loan, he'll have
find someone to cosign who can qualify for the loan. So, even
though the lender has already determined that this person will not
repay the money, you step in and cosign on the loan because you know
this person and you know that he will make all of the payments.
You're not worried since the person borrowing the money has
promised you he will make all of the payments in full and on time.
Well, for the first few months, he makes the payments in full and right
on time just as he promised he would. A month or two
after that, the fun and
of whatever he spent the money on wears off and a couple of
payments are a little late but are eventually made.
some unexpected financial hardship comes along and he is unable to meet
all of his financial obligations. He lets the loan payment
behind by one month, but he is planning to get caught up the next
month. When that next month comes along, there is no way he
make a double payment, so he lets the loan stay one month behind.
The lender begins sending him gentle reminders that his loan
payments are now a month behind, but other than that nothing bad is
Then, a few months later, another financial hardship hits. He
never been really good with money, that's why he needed a cosigner in
the first place, so he has no emergency savings to deal with this new
problem. He has to let something go unpaid. He
since he knows you, and you aren't likely to sue him, the loan you
cosigned is the payment he won't make this month. Now he is
really behind. He is so behind, in fact, that when the next
rolls around, he figures that being just one more payment behind isn't
that big of a deal.
Then, he may get married and now has to support a family, or he loses
job, or goes through a divorce, or gets injured and can't work and
stops making payments completely. The loan is now several
behind and he has been getting threatening letters from collection
agencies for the last two months. Three months later, the
collectors decide that he is never going to pay them, so they start
calling you and sending you threatening letters. If you don't
start making the payments, you are going to be sued and have your wages
garnished. So, in order to keep from getting hauled into
you start making the payments on the loan you cosigned. The
legal option you really have now is to sue the person you cosigned for;
but, since he is broke and can't pay you back, suing really won't get
you any money. And besides, since it is someone you know, you
really don't want to take him to court. So you continue to
those payments for the next several years until the loan is fully
repaid. You never get your money back, and your relationship
this person is changed forever.
Look at it this way:
If you cosign for someone else's bank loan, statistically, there is a
50% chance that you will end up having to make the payments
If you cosign for someone else's finance company loan (car, furniture,
appliances, etc.) there is, statistically, a 75% chance you will end up
having to pay the debt yourself.
So, if you cosign, your chances of having to repay the loan yourself
are between 50% and 75%!
A few more
The lender does not always even have to let the cosigner know that the
primary borrower is behind in the payments. They may do it
even though they don't have to, but then again, they may not.
They can wait until the loan is already far into default,
you notice and sue you. Then, they note the problem on your
credit report and ruin your credit. They can do this
legally, as a cosigner, you borrowed the money just as much as the
person for whom you cosigned.
If you cosign on a car loan, and the other person's
name is on the title of the car, then you can't even
back the car once you start making the payments. The car
to the person whose name is on the title, but since you cosigned, the
debt belongs to you! You can always sue for the car, but good
luck winning the case and paying all of the costs associated with the
If the car is destroyed in an accident and is under-insured or
uninsured, you are still responsible for the difference and
may have to keep making payments on a car that
If you cosign for a rental, whether an apartment rental, commercial
property rental or a car rental, you are still responsible even if you
never moved into the property or drove the car. If you cosign
an apartment rental and the person for whom you cosigned trashes the
place, or fails to pay the rent, you are just as responsible as if you
had done it yourself!
Now you know.
"A stupid person
doesn't matter if it for a child, a close family member or a best
friend, cosigning is a really bad idea. If you do decide to
cosign for someone, don't be surprised when the story I just told
happens to you. Statistically, it will. If you
decide to go
ahead and cosign for someone in spite of the warning you just got, make
sure that you can afford to make the payments if they don't.
sure you can afford to make all of those payments, pay off the loan,
and never see any of that money again. If you cannot afford
these things, then please don't cosign for anyone, anytime ever!
If you want to help them, then start by teaching them the
concepts taught here on the Eclecticsite.com Financial Page.
if you can afford it, just give them the money as a gift with no need
to pay you back. Can't afford to do that? Then you
afford to cosign!
learn a lot more about saving, investing,
eliminating debt and
becoming wealthy, please read the articles
on the Financial Page.
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and techniques given on this site are nothing more than the author's
the matter being addressed. Do further research before making
This article copyright © 2007 by Keith C. Rawlinson
(Eclecticsite.com). All rights reserved.
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