Don’t Cosign Anything!

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If you’re open to the idea of cosigning a loan or credit card for somebody, I don’t want to tell you that in all cases it is a bad idea but I will say that I’ve always had a hard time finding a good reason to say yes to a family member who needs a cosigner. I will also admit that when it comes to money I’m the family bad guy but it’s something I’ve had to get over.

Here’s my opinion: We need to make the world far more scared of cosigning. Kind of like we scared people in to kicking the smoking habit and now we’re scaring people in to eating less junk food, we need to do the same with cosigning because from a financial perspective it’s no different than the health version overeating. It may never cause you problems but if it does, it’s going to be one heck of a problem.

Don’t believe me? I have some reasons why I’m so against cosigning.

It’s Your Debt

The credit industry has done a great job of convincing cosigners that it’s a formality. Nothing will ever go wrong and you’ll never be on the hook. If that were the case, why do they require your involvement? Because the person you’re cosigning for is too much of a credit risk. The bank doesn’t want to pay the price if that person doesn’t pay. That’s your job.

Understand this. If they don’t pay, you’re on the hook for every penny of the debt. There’s no negotiating, no saying you don’t have the money and the bank will have no problem taking food out of your family’s hands to get their money for the debt that wasn’t yours to begin with. Still sound like a good idea? That’s the hard truth that the bank won’t tell you.

Your Credit Report is Blind

Let’s say that you cosigned for a $20,000 loan so a family member could get a car. Even though the loan isn’t technically yours, you have now added $20,000 to your debt load as far as your credit report is concerned. There is no distinction made concerning types of debt when it comes to your debt load.

Their Late Payments are Yours Too

Remember when we said that it’s your loan? Any payment that is not made on time may also tarnish your credit. We are now living in a world where even one missed payment can result in not being able to get a loan in the future.

Bottom Line

I understand that you want to cosign in order to do something nice for somebody you care about. It’s admirable but it’s not a sound financial move. Think of it this way. You’re doing something nice for that person but what if you have to take over payments and it negatively affects your family’s finances? Do you want to do something nice for one person at the expense of others you care about?

What do you think? Am I out of line? Let me know.

{ 21 comments, please add your thoughts now! }

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21 Responses to “Don’t Cosign Anything!”

  1. Adam says:

    Don’t forget that if you co-sign on a loan, and the family member that “owns” it gets in a wreck, you can be sued as well. So co-signing carries legal liability as well.

  2. Jodie says:

    Unfortunately I’ve done this and didn’t realize that the person I cosigned for wasn’t paying the car note until I tried to get a mortgage. While people have the best intention of acting responsibility, when you cosign you are now responsible for your, and someone else’s, financial behavior. Great advice Bargaineering!

  3. Glenn Lasher says:

    I typically agree that cosigning is bad, but I have made two exceptions to this.

    In one case, my mother needed dentures. I cosigned for her so she could get them.

    In the other case, I cosigned a loan for my wife to get a car. As we are not splitting in any currently conceivable future, this seemed like a safe enough thing to do.

    • tbork84 says:

      The only thing that I have co-signed is a auto-loan with my fiance, who I plan on being in my life for a while. But beyond that, I don’t think I would ever co-sign for anyone with the possible exception of children if I could stand to be the one on the hook in the end.

  4. Kathryn says:

    I agree 100% – while there may be exceptions to the rule, in general I would say never do it. The reason a co-signer is asked for is the person on their own would not qualify for the loan on their own, which is a huge red flag.

    My mom, a single parent, co-signed twice for two of her “friends” and was burned both times. Both were for vehicles financed and repoed after they stopped making payments on them. Both times the vehicles were sold at auction and my Mom had to pay the difference between the balance of the loan and what the vehicles were sold for. It not only ruined her credit, it made it almost impossible for her to pay her bills and she had to then borrow from her parents just to survive.

  5. Shirley says:

    My Dad co-signed a loan for a friend and then struggled to make the payments when the ‘friend’ defaulted. That was an early lesson for me.

  6. Nick says:

    Agree. Agree. Agree.

    A very close, dear, personal friend was in the position where a house that had been in his family was in danger of being sold. (Long, twisted story.)

    In short, he asked me to consign a loan so that he could purchase it. I know he doesn’t have two nickles in his trousers, so instead I offered to purchase it outright. If he wants to buy it from me, that’s wonderful. However, if he defaults on the loan, I’m the one with the house, not him.

    • Frugal says:

      While your move sounded a very smart move, do you intend to kick him out of the house, if he does not pay the installments? Would you sell the house if the need be (you can’t afford it anymore) while him in the house?

      It sounded that you may be delaying his finanical issues at the possible cost of your credit and financial risk.

  7. Bey says:

    I think one good exception would be to cosign a small loan for your children, in order for them to establish good credit. I wouldn’t do this if you didn’t have the money to give them yourself (don’t ever loan money you expect to get back), but financing a smaller purchase like furniture can get them off on the right foot. I did this for my daughters, as my parents had done for me. For all other situations, see the title of Jim’s entry.

  8. Frugal says:

    I have yet to cosign anything, however, I would not mind cosigning a small loan for my children. In order to jumpstart their financial life on the right track (to build their credit), I would cosign.

  9. Scott says:

    I think immediate family, specifically parents and children (more than siblings), are the exception. In theory, you should know those people better than anyone and will know before you ever sign anything if you have any suspicions that they won’t pay.

  10. cvargo says:

    I grew up in a lower middle class family and there wasn’t a lot saved for me to go to school, but my parents have amazing credit and my dad co-signed a few student loans for me, but I understand the importance of making those payments and have never been late on ANYTHING! Also my wife and I financed a car together and our house. BUT over the holiday my brother in-law (19 years old) backed into my car and wants to make payments to me instead of going through insurance…. I told him NO, that if he wants to make payments and not go through insurance he needs to get a loan. Is that mean???? In-law is lazy and only works 20 hours a week when he could easily work a full 40.

    • Frugal says:

      “Is it mean?”

      In my opinion, it is if he is willing to pay immediately so that his insurance will not go up. It is not mean if he is not going to pay (which seems more likely if he does not have cash and is lazy).

      My two cents

  11. Robert says:

    Proverbs 11:15 states: “He who puts up security for another will surely suffer……”

    Need I say more? If it didn’t work back then, why would it work today???

  12. Mike says:

    My mom cosigned for my cash back credit card cause I was young and I needed to build up credit. No problems for either of us. I helped her out we the online banking and we never fail to miss a payment.

  13. Anonymous says:

    I have cosigned a loan for my daughter and would have no trouble doing it again for her, I knew she would pay that loan off.

  14. Lesley says:

    Finally! Someone has the nerve to say this and tell the truth. This should be required reading for every kid from the 8th grade up. Thanks!

  15. DebraJoy says:

    I would generally agree ~ but like others above, have made exceptions.

    My husband and I have always asked ourselves First ~ ‘what can we Safely stick our necks out for?’ ~ AND live With ~ with No regrets, if there were a default…(?)
    we have done so. for our kids ~ but Very reasonable amounts.
    ~ and in each case, we have no regrets.

    The first has been paid back faithfully and in full, the second, on account of our good credit, we were able to help our son out by signing a Parent Plus school loan (the liability amount considered a manageable risk). His schooling, we considered to be a wise investment for him. He fully graduated in just three years ~ Summa cum Laude, this past Spring, so we have no doubt that the investment was sound and we have no regrets there.

    At the local bank that I bank with, a teller confided that he co-signed his girlfriends school loan ~ BAD IDEA!! they are not together any longer. I was shocked that a banker would do This (he’s been there quite a long time and is now a manager)~ even more shocked that he would repeat the Story. (I’d be too embarrassed to repeat That one, if I were him)

  16. timparker says:

    Personally, I don’t think there are any exceptions. America is living proof that we aren’t good with credit. It’s a myth that you need to establish good credit at an early age.

    Although I can see good intentions in helping a child, I still wouldn’t want to risk the fallout of a defaulted loan. Not only would I not be happy that I had to pay it but I would have trouble getting beyond the fact that my child would be ok with sticking me with the debt.

  17. cosigneridiot says:

    I co-signed a few years ago for my daughter’s boyfriend to go to college. I watched him grow up and didn’t question his integrity. I just didn’t think and I am now paying the price, he is with a new woman, has a kid, living with his parents and has decided not to pay the loan. I am being hit with $6k to pay, all I can say is no matter how desperate anyone is, no matter how long you have known them or think their intentions will be honorable do NOT cosign!

  18. Skip says:

    I don’t think there should be any exceptions, and that includes co-signing loans, apartment leases, or anything else. If something is alleged to have gone wrong, you are in a poor position to defend yourself because you are not the principal person involved, and you are not in control of whatever happened and whatever happens in the future.
    Rather than co-sign anything, I have often provided the money myself for my children and step-children when they have needed it to buy a car, rent an apartment, pay tuition, or whatever. When they pay me back, then they are eligible for future loans. If they haven’t paid me back yet, then don’t come to me for another loan. This way, you have no additional liability, and your own credit rating is not affected.

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