Why You Should Never Co-Sign a Loan, No Matter Who It's For

Allworth CEO Scott Hanson shares a reminder about why co-signing a loan for a friend or family member is never a good idea, as well as the history behind Mother’s Day. But first, a quick reminder about our new, free resources.

 

If you or someone you love is hurting financially.

In early March, when it became apparent that the economy was about to take a tumble, we decided to create a series of digital “suites,” which are free, special collections of resources.   

Our “Unexpected Employment Change” suite (videos, guides, a consultation) contains resources for navigating a layoff, sudden retirement or furlough.

Our “Disrupted Retirement Plan” suite contains numerous resources for those of you who have had retirement (or your retirement planning) impacted (or derailed) by market turbulence.

Again, these resources are all free, so please download and share the information with anyone who could use them.

Co-sign? No. Co-help? Yes.

When a recession occurs and we lose our jobs, sometimes we borrow to stay afloat, and the debt accrues.

When it comes to debt, there is “good” debt, (mortgage), there is “bad” debt, (credit cards) and there is “never do this” debt.

“Never do this” debt is when you co-sign a loan guarantee for someone, say a child or a friend, who is drowning financially.

Let there be no confusion: when you co-sign a loan, you are taking on that debt.

Lifeguards will tell you not to swim all the way out to a drowning person. Yes, you get near them, and you throw them a lifeline, but you don’t get close enough to let them grab you and pull you under.

The same goes for debt.

To be clear, this is not an indictment of anyone you love or care for. Millions of wonderful people are in debt. And, of course, everyone who borrows money wants to make good on their promises and obligations and not cause you stress or difficulty.

But, as I’ve been an advisor for almost 30 years, if I were to list the number of times that conscientious people I know have been burned (and some arguably ruined) by co-cosigning loans and leases?

That list would be many pages long.

With more economic uncertainty almost surely to come, if you’ve saved well, you’re probably going to be placed in the very difficult position of having someone ask you to co-sign something for them.

In consideration of this, the most direct guidance I can give you is, that unless you have accrued more money than you’ll ever need, don’t do it.

Instead, offer to help. Here are some basics.

First, communicate to the person who is asking you to co-sign how it is technically you who is borrowing the money.

Explain how hard you’ve worked and what a difficult (and vulnerable) position this would place you in.

Why?

Co-signing typically not only dings your credit, it can also limit your ability to borrow and receive the best interest rates.

Simply, what if you have an emergency?

Lastly, of course, if they can’t make the payments, you’ll have to. (You can even be sued.)

Instead of co-signing for an apartment, car or credit card, if you feel you must contribute, and if you have the means (this is very tricky), better to loan the money directly.

In fact, draw up a contract with repayment and interest. That way, if the loan goes unpaid, you might be able to write the loss off on your taxes, and your credit score won’t get hurt.  

Also, don’t underestimate the emotional aspect of a personal loan. A direct loan from you makes you the creditor and makes the loan much more “real” to the borrower.

Remember, almost no matter what happens, a financially drowning relative is much more likely to work and sacrifice to pay you back (eventually, anyway) than they’ll be willing to sacrifice for an anonymous company or corporation.

So, amidst all this financial and unemployment chaos, if you’re asked to co-sign something, difficult as it will be, don’t.

Mother’s Day 2020                                   

Sunday, May 10th is Mother’s Day.

With its travel restrictions and distancing, this one’s unique.

But if you’re someone (like me) who appreciates that there’s a day devoted entirely to celebrating mothers, it’s also comforting to know that this tradition is not merely a made-up Hallmark holiday but is instead a day of gratitude that is steeped in history.

Celebrated in various ways (and on different days) throughout the world, the roots of Mother’s Day date all the way back to ancient Greece and Rome, which held yearly festivals to celebrate the goddesses Rhea (the mother of Zeus) and Cybele (the mother of all living things).

Modern Mother’s Day celebrations date back to the years just after the Civil War when Ann Reeves Jarvis of West Virginia founded what were then called “Mothers’ Day Work Clubs.” The original mission of these clubs was to help Civil War widows take care of their children. Later, with the nation still deeply divided, these clubs evolved to promote reconciliation between Confederate and Union army veterans.

By 1912, most states had established a yearly holiday to honor mothers, and so, in 1914, President Woodrow Wilson signed a proclamation stipulating that the second Sunday in May would forever be known as “Mother’s Day.”

Happy Mother’s Day!

For our own mothers, be they still with us, or passed on, and for the mothers of our children: Thank you for everything you do.

Here’s looking ahead to Sunday, May 9th, 2021, when COVID-19 will hopefully no longer be a threat and we can all safely travel to embrace the mothers in our lives without fear or hesitation.