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Co-Signing: Good or Bad Idea?

It’s not hard to recall many heartbreaking stories of family or friends who have agreed to co-sign some sort of loan and then find themselves on the short end. Just think about it, the only reason a lender asks for a co-signer – whether it’s a mortgage, an auto loan, an apartment lease or some other purchase – is because the original borrower is not reliable enough based on credit history to carry the loan without a backup. So the individual with a damaged credit report and score learns that the lender/creditor requires someone with better credit to be that backup and immediately starts thinking through the list of friends and family who may serve in that capacity. Obviously, it’s probably embarrassing and difficult to ask a friend or family member to be a co-signer.  But whether the requesting person wants or needs the item to be purchased or the situation to be financed, those being asked to take on this additional financial responsibility may also feel awkward and uncomfortable to say the least.

So what does one do if and when asked to co-sign? Just say “no.” Seriously, just say “no.”  Make a policy right now that this is the standard response if asked and then never vary from it. Frankly, the potential outcomes and circumstances that can ensue if this life principle isn’t followed can be devastating for all concerned.co-signing good or bad ideaHere are some of the reasons to just say “no” to co-signing:

1. Family and friends can be some of the best life assets any individual has. Agreeing to arrangements that could at some future date put wedges between those relationships or even break them apart is something to consider when money discussions include the co-signing request. It’s always wise to ask oneself how losing a great friend or family member to a bitter financial outcome might weigh in terms of longer-term happiness.

2. Often the co-signer is the one who the lender contacts and pressures if and when payments are missed or late. Remember, the co-signer is the one who has good credit and therefore reliable to make payments. So why would a lender bother contacting the individual who, for whatever reason, hasn’t reliably repaid debts previously and therefore required a co-signer? The first time the co-signer gets that call from the collector, financial and emotional consequences start to impact in a way that can be damaging to all involved.

3. The co-signer will be totally liable for the debt if the original borrower doesn’t pay. And often the co-signer may not have access to the “thing” signed for. In this case, it’s all about losses for the co-signer. Ongoing payments, a lump sum and even collection and attorney fees may be required from the co-signers budget or savings.

4. Co-signing a loan means that the co-signer now has a new debt obligation. This obligation shows up on the report of this individual just as it does for the original borrower. This added debt could be a future impediment to the co-signer’s ability to borrow due to higher debt levels.

5. Also, consider that an open and honest relationship and coordination will need to be maintained with the original borrower no matter what. The co-signer will need to stay on top of payments made (or perhaps late or missed) in order to manage both the friendship and personal finances.

What’s the alternative if a friend or family member requests a co-signer and the individual approached is hesitant or has a life policy to just say “no”? Here’s a suggestion. Given that the person wanting to borrow or take out the loan obviously trusts those asked for assistance, it might be just as wise and loving to just pay for the item or cost to begin with. Especially in the case of children or a spouse or close family member, taking this step may just reduce all of the possible negative consequences for everyone concerned. And the individual needing the support may be allowed time to repair damaged credit as well. Perhaps at a later date the debt can be repaid. This requires that the actual borrower make a very personal decision to demonstrate love and concern for the other individual who makes the original request no matter if the money is ever repaid. If the relationship doesn’t warrant this kind of sacrifice, then it’s arguable that the original remedy is still the best remedy – just say “no.”

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