Good intentions can ruin you financially.
People who are looking for someone to co-sign a loan for them often look for the nicest, sweetest, and gentlest person they know well. If you have been asked to co-sign for a loan, congratulations on being one of the nicest people in the world. But, now it is time to do the right thing.
No matter how long and tragic story their story is, you need to remember that co-signing a loan is dangerous.
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Why Is Co-Signing Dangerous?
- The lending conditions are a high risk: If someone is trying to get you to co-sign with them, it is because they could not get a loan from a bank or other financial institution. This means that those organizations consider this person too high of a borrowing risk. When someone cannot get out of debt they are a credit risk. If you look at how much money credit card companies are willing to extend to people, I take it as a very bad sign when a bank says someone is not lender worthy. I would not lend to someone who is not eligible for a bank loan. Best case scenario, I might point them in the direction of Lending Club, but depending on the situation, that could cause more damage than help.
- When you co-sign a loan you are putting your own funds on the line: When you co-sign a loan, you are committing to paying back all of the money, interest, payments, and fees if the other person does not. You are assuming complete financial liability for this transaction. It is your loan that you are asking someone else to repay.
- The co-signing relationship puts a friendship on the line. Best intentions do not pay bills. If a person cannot afford to make their payments, what do you think will happen to your relationship with that person? When a person who you cosigned for does not pay, you will likely feel hurt, violated, and taken advantage of, Your kind gesture may not be returned in kind. As a result, it will be nearly impossible to maintain a healthy relationship with someone after they default on a loan you cosign. Is that a risk you want to take with a good friend or family member?
Biblical Teaching on Co-Signing Loans
Here are three of several passages from proverbs on the topic of pledging for another (what we would call co-signing):
My son, if you have put up security for your neighbor, if you have struck hands in pledge for another, (Proverbs 6:1 NIV)… Free yourself, like a gazelle from the hand of the hunter, like a bird from the snare of the fowler. (Proverbs 6:5 NIV)
A man lacking in judgment strikes hands in pledge and puts up security for his neighbor. (Proverbs 17:18 NIV)
Do not be a man who strikes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you. (Proverbs 22:26-27 NIV)
Each of these passages make it clear that co-signing on a loan is not a biblically advisable action.
Why Do People Still Co-Sign?
- They want to help someone else.
- They don’t understand what they are committing to.
Are you really blessing someone when you co-sign for them?
I tend to think there is little benefit from borrowing money. Borrowing money you cannot afford to repay is even more nonsensical. By becoming a barrier to someone borrowing money, you are actually blessing them more than if you enable them to get a loan they cannot afford.
I know people break the rules all the time so… If you are going to co-sign either way, be sure the item being purchased in the loan is in your name.
Here’s why:
- You’ll have access to the account information so you’ll know if payments are being made.
- You’ll be able to repossess and sell the item.
- You significantly minimize the risk (though it is still risky and a bad idea).
Have you ever co-signed a loan? Would you do it again? Any other dangers I forgot to mention? Tell us your thoughts in the comments.
Someone close to me was the borrower and allowed a friend to co-sign for a vehicle purchase. The co-signer had an 800 credit score and the payments were relatively low. I advised the borrower to keep the lines of communication open because scores like that are rare, hard to attain and harder to keep. A payment was late and the friend’s score took a hit.
Now the co-signer makes the payments and the borrower pays the co-signer instead of the lender. Their friendship is still intact, but there was disappointment expressed.
This works in theory, and in theory I completely agree with you. In reality however, there are certain cases where co-signing is very difficult to avoid. For example:
1. Student Loans: Education, especially at higher institutions is expensive. Not many have the capital to pay up front. That’s why student loans are such big business. Would you deny your child a college education because you didn’t want the credit risk?
Student loans helped pay for my education even though I received substantial scholarship offers. I don’t regret the decision. I just have to work to pay them off now. Yes, parents should save for kid’s college, but that doesn’t always happen. In that case, student loans and scholarships are the only option.
2. A child’s first car. I drove my parent’s 1991 Volvo for years. When it came time for me to buy my first vehicle in my 20s, I still didn’t have the necessary credit history to buy on my own, even though I had been using a credit card sparingly for a few years. So my Dad co-signed with me.
Do I wish these cases had been different? Absolutely! I hate the fact that my actions affect my father’s credit history. It makes me want to get my debt eliminated as fast as possible so it doesn’t strain our relationship.
Like I said I agree with the spirit of your post and agree in theory, but you are ignoring cases where co-signing is very difficult to avoid.
@Ryan
I understand the situations you are talking about, but they can be avoided as well. Most college loans are backed by the government and don’t need a co-signer. As for the car, the first car can just be a beater. Save up the money and buy it without debt. Or if dad really wants to help he can just give you a down payment. With the down payment the bank is much more likely to not make you co-sign.
Derek – Christian Common Cents´s last post ..How My Emergency Fund Saved My Honeymoon From Total Disaster
Your advice is right on. Co-signing a loan is almost never a good idea.
Craig,
I so appreciate your article. Co-Signing is also called ‘surety’ in the Bible and as you know, does not in itself constitute ‘debt’, but is rather guaranteeing the debt of another. If you guarantee an amount beyond your ability to pay from quick assets, then you would, in effect, take on debt.
To obligate yourself to pay someone else’s debt regardless of their abilities, morality, and responsibility (or lack of it), you violate Biblical principles. (Proverbs 22:26-27)
Thank you for your excellent article.
Randy Redd – rreddink.blogspot.com
Be prepared the pay for the loan if you do co-sign. The very reason banks require co-signer’s is because they do not believe the person taking the loan will make the payments. Also, remember Provebs 6 and consider doing everything possible to get out of the co-signing arrangement if you are there already.
Craig- No I would never cosign on a loan for someone. Having been in banking as a lender and a underwriter, I remember several occasions watching friends turn into enemies and parents not talking to their kids because of unpaid loans.
I agree with your statement that cosigning for a loan is dangerous and love the fact that you added the scripture from Proverbs 6:5! Outside of situation that are totally out of someones control, there’s usually a reason why someone has such poor credit that they need to have a cosigner! And that reason is because they don’t pay back there debts! So what will make this time different?
How about we get to the point where financially if a brother or sister is in need then we can just help take care of them with no strings attached and just bless them with no debt?
Ok you got me fired up! LOLvI think you know where I stand on this! Great post my friend!
Carlos Frank´s last post ..Bible Based Debt Elimination
True those versus may speak against cosigning on a loan, but how many other verses in the bible is there about helping your neighbor, what you listed as number 1 on why people cosign for others.
May father had to cosign for my girlfriend to go to Grad school a while back (she is from Trinidad), and because he did that, she now has almost $50,000 of debt…BUT an excellent job making great money. If it was not for him, she would not have the job, degree, or life that she enjoys today.
myfinancialobjectives´s last post ..
It is not necessarily helping your neighbor when you are helping them get into debt. In your example things turned out ok, but many many times it ends up ruining relationships. If she defaulted on that loan your relationship with each other, and both of your relationships with your father would be severely strained if not ruined. That is not helping your neighbor.
Derek – ChristianCommonCents´s last post ..How My Emergency Fund Saved My Honeymoon From Total Disaster
I don’t think it’s difficult to avoid. The bible says not to cosign. Period. It’s that simple. Parents should not cosign for that child’s first car or for a student loan. Save up cash for that first car, No cosigner required. Same with student loans. Save up cash to pay for college. It’s not easy, and it’s totally opposite of what society says, that you need a car loan and student loan. Not true. If parents would save $166/month for 17 years, that’s over $30,000 for their kids college. Cash. If you’re going to win with money, you need to stop doing what the culture and everybody else is doing. Taking on debt. And cosigning.
Parents cosign because they want to help and they are unaware of the dangers of cosigning. The bible says do not cosign. It does not say don’t cosign unless its for a child’s car or student loan.
The only time I can think of that co-signing is a good idea is if its for a son or daughter. Any other time it is a hugely bad idea and the risks are huge.
And these risks can affect relationships as well, they are not just monetray risks.
This is a situation where you simply have to learn how to say “no”.
David/Yourfinances101´s last post ..Easy Ways to Save Money on Printer Paper and Ink
@Ryan,
I went to college and graduate school and purchase my own first car without having someone cosign a loan for me. The reasons cosigning would be difficult to avoid is if someone does not take the time necessary to save the money or they buy more than they can afford.
Your right that it might be difficult to do these things without cosigning, but with some focus, creativity, and effort cosigning can be avoided.
@Carlos Frank
Thanks for sharing your experiences. It is nice to have some experiences that verify the dangers of cosigning.
@Myfinancialobjectives
Since the Bible teaches us to avoid cosigning and loving our neighbor we have two choices. Either conclude that the Bible contradicts itself or conclude that cosigning is not a way we show love to our neighbor. I go with the second option.
“If you are going to co-sign either way, be sure the item being purchased in the loan is in your name.”
That’s a wise idea.
I’m reminded of my mother who was financially devastated because she served as a guarantor for the loans of almost an entire community.
I’ve learned a lesson that you can only lend money or co-sign what you can afford to lose. Because most often than not, you will lose…
Thanks Craig for this useful post.
Jose
Jose@Christian Business´s last post ..What the Bible Teaches Us About Copywriting
The problem with co-signing is you lose complete control over your credit and become at the mercy of the person you are co-signing for.
Bill Gassett´s last post ..Massachusetts Homestead Protection Act
I’m an international student in US from developing country. Already got my bachelor’s degree and right now changing me career by going to grad school so I could do more for the Lord and people around me. Have no money not due to financial irresponsibility but because not eligible to make any money in US. I’m really thankful to have people who support me now while I’m completing my prerequisite classes for grad school at the community college but grad school cost is way too much so I need a loan.
God has been leading me towards specific area so I could work with post institutionalized children adopted by American families (had a lot of incredible experience in that field as a volunteer – we are talking not couple hours week but about full dedication in the free time and for a whole year). In the order to work with them I need to get a Master’s degree and a license. This degree is not offered in my homecountry. Also, being international student with no social security number does not allow me to get me any student loans without a co-signer. So I have no other option then asking someone to co-sign it. Trust me, I did every research possible: scholarships, legal status to work, etc. This country makes it impossible to get a student loan without a co-signer for people like I am. I’m very responsible, smart, kind, dedicated and passionate person who have helped many American families and just wants to get a degree in the order to help more children, be more effective and make a living (being volunteer doesn’t really work for the whole life because I want to have my own family). Being bilingual also is my advantage.
It is impossible to go back to my home country, work and to save the money and then try to come back because average salary in my country is $ 6,000 per year and cost of living is about the same as here (accept for electric, water and those kind of housekeeping bills). Some things are even more expensive than in US. Being in my country I would never be able to live, safe money and then come back to US and pay for school.
I do believe that God has brought me where I am and I’m sure this is what I am called to do.
Please don’t tell me to try to get work visa is US and try to make money here. It’s almost impossible. Too many applicants than work visas available, in this economy almost all companies do not sponsor work visa (unless you are incredibly brilliant and gained YEARS of experience) or just don’t hire if you don’t have US citizenship or green card because there are so many without jobs in US these days. Trust me, I know what I am talking about. So my only way out is to ask somebody to be my cosigner. Master’s takes only 2 years and then I will be out there making money and paying for the loan. I just need someone to give me a chance.
I do believe that God will help me and He surely opens doors for me. I just need to keep fighting. So please tell me, what is wrong with that?
I would never ever make anyone to pay off my loan. I do own an apartment back in my country so in the worst case scenario my family could sell it (and trust me, they would) to pay off the loan in case of my death or health inability to pay. Some of you would say – then get a loan in your country… Well, I could. But my rate would be around 20 % if not higher (I worked at the bank so I know what I am talking about). Sell the apartment? Why would I sell it if few years later down the road when economy gets better I can sell it much better and get almost double cost of what it is worth of now. This way I would be able to pay off the rest of the loan and get a down payment for the house for my future family here.
Please tell me, what is wrong with that?
It is so easy to say things when you’ve never faced the circumstances and don’t know about the challenges some people face.
What I don’t understand is if you can’t get a work Visa, and you aren’t able to make money, how are you going to pay for the loan that someone would co-sign for you? I’m not trying to be mean, just trying to understand your situation. Because to me if you aren’t able to make money and save, you also probably aren’t able to make money to pay the loan back on it’s terms?
Yes, I understand what you saying. Well, I’m in relationships with most incredible men that I have ever met and we are talking about getting married in the nearest future. He is a US citizen (can’t be my co-signer because his own student and car loans to pay for – and it won’t give be a good rate).
Regarding the legal status – during your last semester of school (if you are still on student visa) you may apply for OPT and it means Optional Practical Training which allows you to work in US after your graduation for another year. In addition to that, it is MUCH easier to get work visa once you have an American degree rather than bachelor’s from my home country. Also my school makes you do internships during the whole two years of grad school (part of the studying program). During those two years you have a chance to develop great relationships with the organization and around 90 % of students get the job because of those internships and connections they have developed (official data from my school). Once you got the job, then most likely you get sponsored work visa, if you are a good worker. Sometimes organization will offer you to sponsor the visa yourself but they will do the legal part which the most important thing. And trust me, I am a very good worker. I have amazing recommendations and always was blessed with companies and people I worked with/for.
In addition to that, the field I am going into does need more people with this degree and I cannot enter the field without it. So there are jobs out there even with this economy. Not to mention the parents and adopted children who do need help.
In my case, we do plan to get married and by the end of my education I will have permit to work because I will be married to US citizen.
Some people also might wonder – then why don’t you make things easier and get married right now? There are too many factors that I can’t just put on here. But the main one is that I don’t want to rush into marriage in the order to make my life easier. It’s just the wrong thing to do. On top of that I am too overloaded with classes that I am taking that it just won’t be how I would like it to be. I want things with the school to get settled.
It is very overwhelming for me right now and many people have no clue what some international students have to go through in the order to get education here. I had so many complications and humiliation to go through so it’s God’s miracle that I am here and there are no words to describe how much thankful I am to get this chance.
Peter, it is also not the matter about not being able to make money and save – I know how to do that. In fact, I became very frugal when it comes to my needs. The problem is that I am not eligible to work. I wish I was able to work here! I have people who support me right now and who cover the basic needs so there is no way to save if you don’t have your own money.
To be able to work I need a degree, to get a degree I need a loan, to get a loan I ned a cosigner. It’s either give up on my dreams and the experience I had, families I have helped and go back to my home country and be miserable or keep doing what I am doing – fighting for it.
So many people take things like education, work, citizenship, house, car, etc. for granted… And everything I had in my life I had to fight for. I am just not a quitter…. Even though it does get really really tough but Lord has been so good to me and blessed me incredibly. So I keep trusting and relying on Him with all my heart.
Ok, so it sounds like the loan wouldn’t need to be repaid until after you graduate with a degree – at which time you could get a work visa and begin repaying it? Good luck and God bless!
I wish I came across this info a few years ago or atleast focused on Gods word a bit more then I wouldnt be in this predicament.My husband and I signed surety a few years ago on my in laws property for a further loan so we could build a granny flat and live on the property so he could be closer to them,they are not christian though.They never liked me because I am christian.I took the forgive and do good route.We took it and thought we were only signing surety for the portion we took but it was for the whole bond amount.We took the loan and we paid for our portion every month because that whats we promised.This year in Jan12 my in laws decided to stop paying their amount and we find out that we as surety become responsible for the entire home loan!!!! We then tried to buy the house from them,they signed the purchase agreement then stopped the sale when our home loan was approved claiming they dont want to sell to us.In other words we must just pay because we are surety and they will live there.We are devastated but have figured there is nothing we can do so we are moving out. We hear the bank may reposses the house soon and we will also be blacklisted etc We contacted the bank to be removed as surety but they wont entertain family issues. So you are right ” NEVER SIGN SURETY FOR ANYONE” God Bless!!!!
This is so true. I am a co-signer. I really didn’t know the ins and outs of co-signing.
The individual that I did this for was laid off from work.
His loan was financed through Exeter.
Dealing with his late payments, my credit score is now 488.
Do take heed to the living WORD of GOD!