We commonly see people facing financial problems who have co-signed a loan for another person. In some cases, it is the co-signed loan that actually drove the person to see a Bankruptcy lawyer or file for Bankruptcy. It is usually a debt that the person never expected to pay back. There is a general rule that governs when you should co-sign a loan for another person and that rule is: never co-sign a loan for another person. Yes, you read that correctly – never. When you co-sign or guaranty the debt of another person, you are agreeing to take on all the liability and you get none of the benefits. You do not get the car, the education, the television or furniture. You probably will never know the primary borrower stopped making payments until a default goes on your credit report. Think about this question: Why do people need co-signers? It is because they have a poor credit history, no credit history, or insufficient income from which to pay the debt. In short, the lender believes there is a pretty high probability they won’t or can’t pay the loan back. This is your red flag (and it is a big red flag).
All rules have exceptions, right? What if your mother or daughter need a vehicle to get them to and from work? Surely, that is an exception? No, it isn’t. If you are credit worthy (and you probably are to be approved as a co-signer), then you purchase the vehicle and, in turn, allow Mom or your daughter to drive it. They can make payments directly to you until it is paid off. This allows you to not only get your car back if they stop paying, you can keep tabs on insurance and maintenance to make sure your interests, as well as the lender’s interests, are protected. Allowing someone to drive your vehicle does come with some risks, so you should not only make sure there is plenty of insurance for the vehicle and driver, but you also have additional homeowners or umbrella insurance to cover any problems. Of course, the relative should be trustworthy. If not, why would you have considered co-signing?
How about co-signing for student loans for your child? We all want our children to get a great education and these days co-signing for student loans has just become part of the process. Your son or daughter will get a degree, get a good job and be able to pay them back with no problem, right? Well… the sad reality is that more and more this is not the case. Borrowers over 60 have become one of the largest classes of student loan debtors, primarily due to co-signed debt. I will not go into the alternatives to funding an education without student loans because there are many great sources on the web for that information. If you can afford it, certainly pay for some ongoing expenses for your child when they are in school. You can even make them sign a loan agreement to pay some of it back later. If you cannot afford to do this, how will you afford the payments (plus interest) when your child can’t find a job? Unfortunately, many parents are forced into Bankruptcy not because of their own debts but because of massive student loan debts of their children. Importantly, student loan debt is also generally nondischargeable for parents the same as if they were the primary borrowers.
For just about anyone else, whether it is friends, girlfriends, boyfriends, fiances, or whoever….just say no. Every single time. If you really feel compelled to help them, and can afford to do so, offer them a little money to allow them to make a bigger down payment. If they pay you back, great. If not, be prepared to let it go. Just do not risk your own financial future on them.