Why Is Co-Signing Dangerous?

Good intentions can ruin you financially.

People who are looking for someone to co-sign a loan for them often look for the nicest, sweetest, and gentlest person they know well.  If you have been asked to co-sign for a loan, congratulations on being one of the nicest people in the world.  But, now it is time to do the right thing.

No matter how long and tragic story their story is, you need to remember that co-signing a loan is dangerous.

Why Is Co-Signing Dangerous?

  • The lending conditions are a high risk: If someone is trying to get you to co-sign with them, it is because they could not get a loan from a bank or other financial institution.  This means that those organizations consider this person too high of a borrowing risk.  When someone cannot get out of debt they are a credit risk.  If you look at how much money credit card companies are willing to extend to people, I take it as a very bad sign when a bank says someone is not lender worthy.  I would not lend to someone who is not eligible for a bank loan.  Best case scenario, I might point them in the direction of Lending Club, but depending on the situation, that could cause more damage than help.
  • When you co-sign a loan you are putting your own funds on the line:  When you co-sign a loan, you are committing to paying back all of the money, interest, payments, and fees if the other person does not.  You are assuming complete financial liability for this transaction.  It is your loan that you are asking someone else to repay.
  • The co-signing relationship puts a friendship on the line.  Best intentions do not pay bills.  If a person cannot afford to make their payments, what do you think will happen to your relationship with that person?  When a person who you cosigned for does not pay, you will likely feel hurt, violated, and taken advantage of,  Your kind gesture may not be returned in kind.  As a result, it will be nearly impossible to maintain a healthy relationship with someone after they default on a loan you cosign.  Is that a risk you want to take with a good friend or family member?

Why Do People Still Co-Sign?

  1. They want to help someone else.
  2. They don’t understand what they are committing to.

Are you really blessing someone when you co-sign for them?

I tend to think there is little benefit from borrowing money.  Borrowing money you cannot afford to repay is even more nonsensical.  By becoming a barrier to someone borrowing money, you are actually blessing them more than if you enable them to get a loan they cannot afford.

I know people break the rules all the time so…  If you are going to co-sign either way, be sure the item being purchased in the loan is in your name.

Here’s why:

  • You’ll have access to the account information so you’ll know if payments are being made.
  • You’ll be able to repossess and sell the item.
  • You significantly minimize the risk (though it is still risky and a bad idea).

Article by Craig Ford

Have you ever co-signed a loan?  Would you do it again?  Any other dangers I forgot to mention?  Tell us your thoughts in the comments.

Tuesday, April 6th, 2010 Credit

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