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4 reasons why you shouldn't co-sign a loan

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Have you been asked to co-sign a loan? Allworth Co-CEO Scott Hanson explains why you should just say "no."
 

Here’s a sobering statistic: The Federal Trade Commission has reported that 75% of loan-seekers who require a guarantor eventually default. 1

Simply, they thought that in the event that the loan went unpaid, that their place in the creditor’s “rolodex of culpability” would rank them somewhere toward the end of the line.

That is not to say that everyone with a low (or no) credit score is a terrible risk. After all, it’s difficult to build credit when you are young and have a short or limited work history.  

However, consider that via hard work and sacrifice, most of us have managed to build our credit. And I have personally seen an almost uncountable number of well-intentioned people co-sign something and then later come to regret it.

Are you being pressured to co-sign a loan for a friend or loved one (like an adult child)? Here are 4 reasons why you should never do it (along with some alternative options you may not have considered).

1. The risk is entirely yours

I’ve spoken to a lot of folks who believed that acting as a co-signer was virtually the equivalent of giving someone their blessing. Simply, they thought that in the event the loan went unpaid, that their place in the creditor’s lineup of responsibility they’d rank someplace towards the end.

Not a chance.

Remember, the reason your friend or relative got the loan was because you signed on the dotted line. So, if you co-sign, legally that loan is yours.

2. Co-signing could limit your opportunities for more credit

Many people do not realize that when you co-sign a loan, it goes directly on your credit report. And utilizing a higher percentage of your available credit (not to mention the effects of a formal credit check) will ding your credit score, raise interest rates on any future loans you apply for, and limit your options should you need to borrow money, get a new credit card, or refinance your house.

3. A single missed payment could make the entire balance due

As you are co-signing for someone who, despite their best intentions, is statistically likely to miss a payment or pay late, you must understand that many types of loans have a provision wherein 100% of the balance is due if a single payment is missed.

And if your benefactor misses a payment? Odds are they will not inform you until it is too late. And once that happens, you are going to potentially need to come up with the entire balance rather than just cover a few payments while your charge recovers, gets another job, or otherwise works to catch up.

The lender has the legal right to insist.

4. Saying yes might do much more damage to the relationship than saying no

Understandably, most people want to help friends and relatives in need. But while it’s normal to be concerned about damaging a relationship by refusing to co-sign a loan, the more likely scenario is the relationship gets destroyed because the person you go to bat for is unable to fulfill their obligation.

My experience has been that not only do people often quickly recover when they ask you to co-sign and are told “no,” but a loan agreement gone bad is much more likely to drive a lasting wedge between you and the person you were hoping to help.

Rather than co-sign a loan, here are some ways you can help, but with far more certain outcomes.

First, if you’ve been asked to co-sign and have taken these words to heart and feel you must say “no,” explain why: At this stage of life, you can’t afford to risk damaging the high credit score that you’ve worked so hard to achieve.  

If a friend or loved one needs help, and you want to assist, if you have the means – while it is entirely possible that this might just prolong their failure to launch and extend their credit troubles – I would recommend that you just give them money as a gift.

Remember, you do not want to mix your credit with theirs.

And if they are new to adulthood and trying to build a better credit score? You could give them the money for a secured credit card.

My experience has been that the last thing that folks with credit issues need is more debt. What typically benefits them the most is a thorough, and even hard, conversation about budgeting.

It is not a character flaw, but most people are never going to break the debt cycle and build their credit until they make some changes to their relationship with money.

Would you like to learn more about award-winning Allworth Financial?

Click here for free access to our complete library of tools and guidance, including podcasts, workshops, articles, and checklists.  

 

1 Don't Co-Sign Loans For Your Grown Children (yahoo.com)

 

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