Never Cosign a Loan Unless You Want to Pay It Yourself

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One of the most common questions I get is whether or not a person should cosign on someone else’s loan – a car loan, a student loan, or so on.

I have a single response that I always give to this type of question:

You should only co-sign a loan that you’re perfectly happy paying off yourself.

If you would be unhappy with being forced to pay for the loan yourself, then you should not be cosigning that loan.

Here’s why.

First, the reason a lender wants a cosigner on a loan is because they believe that the person they’re lending to has a high likelihood of not paying back the loan. Usually, a person that needs a co-signer is a person with poor credit or, in some cases, a person with no credit history at all. This means that either they’ve never dealt with the ins and outs of paying a loan back before or they’ve attempted it and failed to pay back their obligations.

Second, if that person who the bank has deemed untrustworthy proves the bank to be correct, you’re left holding the bag. Co-signing isn’t just a way to help a friend. It essentially means that you’re hung with the debt if the primary signer decides not to go through with actually repaying the debt.

Third, when you turn a personal relationship into a financial one, you introduce a lot of strain in the personal relationship. If they default on this loan, what will that do to your relationship? It will be very, very hard for the two of you to be as close as you once were.

These three things together make for a dangerous mix. They put your finances at significant risk without any direct benefit to you. You’re betting that someone is reliable when someone else who is not involved has looked at the evidence without emotions clouding their judgment and came to the opposite conclusion.

To put it simply, you’re saying, “Sure, I’ll take on more risk than the bank.” You know, those paragons of financial stability who were quite willing to hand out adjustable rate mortgages like candy and almost tanked the United States economy.

“But I really want to help!” This is often the reason that people use to talk themselves into such large amounts of risk. The person asking for their help is someone who they genuinely want to help and so they let their emotions cloud their judgment and sign away.

Here’s the thing: you can usually help quite a lot without signing on the dotted line.

Offer resources that you can give them. If you want to financially help someone, don’t do it in a way that puts you at risk and don’t enter into a financial arrangement with them that could damage your relationship. Instead, make it a gift. Give them some cash to buy a beater to get back and forth to work or to put a deposit on an apartment. Let them live in your spare room for a few months. If they want to pay you back, let them, but make it clear that you don’t expect repayment.

Offer intangibles. Invest your time in them by driving them to job interviews or taking them around to buy a car. Invest your contacts in them by calling someone you know who can help them get a job. Listen to what they’re talking about and going through and offer your advice and whatever else you can offer.

In other words, offer all the help you can without introducing unnecessary risk into your life. Don’t co-sign, but offer help in every other way you can.

From my perspective, there is one exception to this. I think that the intangibles related to a parent co-signing on a student loan for their freshly graduated child likely add up to more than the risk of signing such loans. In that case, a parent is often a fairly good judge of the situation and if they view the risk of co-signing in this situation as acceptable, it seems to me to simply be an extension of the risks of parenthood.

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41 thoughts on “Never Cosign a Loan Unless You Want to Pay It Yourself

  1. i agree a point. my husband is now disabled and our finances went south. his mom co-signed so that we could move into student housing while he finished his degree– he graduates this week!!! i am so proud of him. we have the money to pay the rent, (disability $$) but the university insisted on a co-signer. if we hadn’t had her co-sign i don’t know if my husband would have a degree now. but it worked cuz his parents knew that he would not default. the level of trust was high.

    maybe this is an extension of your student loan thinking, tho we are long down the road from still being parented by our parents. things happen in life and i’m glad his mom was willing.

  2. Trent, when you’re right, you’re right.

    My parents co-signed a credit line for me 12 years ago, my first summer after college started. When it was maxed out, five years later, they paid it off. After some time had passed and they figured my ego could handle it, they explained that they never expected me to be able to cover it, and I didn’t need to pay them back.

    I suppose they felt it was a less expensive lesson than merely lending me the cash. Certainly, it taught me to stop viewing credit as free money.

  3. So right on. My parents co-signed for a student loan for my husband for his first year of law school. What could go wrong? We divorced and he has defaulted on the load, leaving my parents holding the bag.

    Forget the money. The real fall out is the huge strain on my relationship with my parents that’s taken a lot of time and effort on both our parts to mend.

    I would not ever repeat this mistake. The potential destruction of trust in a valued relationship is not worth the initial urge to “help.”

  4. Trent,

    solid advice, I find myself having to explain this concept to person after person who are not exactly sure what they are stepping into on some altruistic day.

    As clients are looking for way to tighten their budget to improve their brands with Alta Brand Agency, I will remember to pass your advice along to help them understand.

  5. I would even go so far as giving the person a moderate sum of cash but could never ever cosign a loan. Nope. Not me.

  6. This is so true. Unless you’re willing to lose both the money AND the relationship, lending money or co-signing loans to close friends and family is a no-win proposition. Even if you are prepared to lose the money, chances are the relationship will be damaged as well, whether through resentment by the lender or by guilt or self-justification by the borrower. An outright gift does not have these risks.

  7. NEVER EVER co-sign a loan. Don’t do it out of love or money. There is a good reason why the bank won’t give that person a loan without a co-signer…don’t be the victim. The Bible even talks about not doing this, LISTEN.

    Dollars Not Debt

  8. My wise high school physics teacher would start off class by reminding us of life’s three important rules.
    1. Never loan out your CDs.
    2. Never co-sign a loan.
    3. If you can make a triangle out of it, you can solve it.

  9. A relative of mine co signed with her grandson (about 20-ish yrs old) for a college loan. He somehow blew through the money in a year, didn’t go to school, & now the banks are calling her for payment. Meanwhile, he’s all happy making marriage plans & trying to buy a house.

    Like GC, I’ll give a gift but I will NEVER co-sign. Ever.

  10. Trent, thanks for the last paragraph. I was shaking my head all the way through this post until I got to the end. Lots of folks (Dave Ramsey being perhaps the most prominent example) are advising everyone to avoid credit, which is all well and good, but I’ve always felt the hidden downside was that if you don’t have a credit rating, you can’t get credit when you really do need it. Kids starting out probably don’t have that credit, or if they can get a loan, it’s only with a lender who is willing to charge them some ridiculous rate to offset the risk. If the difference between my daughter getting a loan without me or getting a loan with me is a substantially worse interest rate, and I’m as confident as I can be that she really can afford whatever it is she’s trying to buy, then it seems pretty harsh for me to say I won’t cosign her loan and I’d rather she suffer through the unnecessarily high interest rate because of it. And I’m not talking about a situation where she’s trying to buy too much car or too much house – I’m just saying she shouldn’t have to pay 19% interest on a ten-year-old car just because she doesn’t have any credit history at all, and if having me on the loan can cut that rate in half, then that’s a “risk” I’m happy to take.

    For me, the acid test will be, can she afford the payment at the ridiculous rate? If so, then she can certainly afford the lower payment, so my “risk” is virtually zero anyway, and I’ll be happy to help her out. In other words, if she wants me to cosign her loan, then she’ll have to “apply” with me, as well.

  11. I co-signed my cousin’s student loan, knowing that I would have to cover the occasional monthly payment. She is helping me with my kid as I go back to school and that doesn’t leave her a lot of time to actually work and make the payments herself. Yes, my credit will take a slight hit, but in a few years my credit will be back to great and my cousin will be able to fully pay off the loan.

  12. I co-signed on my father’s mortgage. I know the standard advice, but my parents sacrificed so much for us when we were growing up that I truly owed it to him. After everything he went through to make sure we had our needs (and many wants) met despite making roughly minimum wage, working split & graveyard shifts so that we never had to go to daycare or be latchkey kids…how could I say “No, sorry. I’m successful because of you but I won’t share it.” It killed my dad to have to ask, but the situation was dire (and complicated) and he has paid extra on the mortgage every month. It doesn’t matter if he eventually defaults. I owe what I have to him and if that means paying for his home, so be it.

  13. My parents cosigned on a car loan for my brother when he graduated from college. As far as I know, it’s worked out well. My brother had little income history and no credit history, but my parents knew that he was responsible with money. So I think there’s a big difference between cosigning for someone with bad credit and cosigning for someone with no credit. (If you don’t know which you’re dealing with? Don’t cosign.)

    A better solution might have been for my parents to have taught my brother (and me) the importance of building a solid credit history before you actually need to use it. But they didn’t.

  14. I had someone co-sign on a loan for me and being young and stupid, I missed a few payments (having a lot of financial issues at the time). The co-signer, my aunt, covered the payments but it taught me a lesson I will never forget about helping people out and paying my bills on time. Never missed another payment, no matter what.

  15. I think the co-signing relationship *can* be appropriate between parent and child if the person benefitting from the loan is responsible and considerate. My parents and my husband’s parents have been co-signers for my husband or I on a few items (our first car & my first credit card for example) Knowing that any irresponsibility on our part would have a serious impact on their credit history made us feel extra responsible for re-paying those loans appropriately.

  16. I had someone co-sign a loan for me before I had any established credit. Of all the stupid financial choices I made in my life, I help up my end of the bargain on that one because I knew my choices affected someone else. I was never late on a single payment, even when I couldn’t afford to pay the rent. I did give them my word, afterall.

  17. So true, so true. My brother co-signed a school loan for me a few years back and even though I never missed a payment (in fact I paid it off early) it still gave him a ‘one-up’ on me. To this day he STILL talks about how he ‘saved’ me from a life of drugery and how ‘lucky’ I was to have him. Never again.
    Ahh brothers and sisters….

  18. I completely agree…only co-sign a loan you are comfortable repaying.

    I’ve been asked to co-sign a couple of times by friends and feel awful when I say that I just don’t do that. One friend ended up skipping the payments so long that she filed for bankruptcy. The other did just fine. I still feel like I made the right choices.

  19. If having to repay a defaulted student loan for a child would leave you impoverished in old age- don’t do it.

    Irresponsibility is not the only reason for default-medical issues, unforseen events, etc. That also has to be taken into consideration.

  20. Never ever co-sign on anything. The person is not asking for a favor. They are asking for a crutch and for bad behavior to be rewarded over and over again.

    I have seen co-signing completely ruin familes and have the prefect credit rating of older parents completely destroyed for YEARS by chidren that had terrible spending habits. There is no plus side of being a co-signer.

    -Joshua Black
    The Underdog Millionaire

  21. If a parent co-signs a student loan, doesn’t that mean the parents and the child have not saved enough, the child isn’t able to earn much while going to school, the child is going to be paying college costs beyond their means? In other words, is anybody in this situation really good credit risk?

    In the case of my own child, I might have co-signed a small loan. But hearing stories of people tens of thousands of dollars in debt with little realistic chance of paying it back made me very glad we planned well enough to get my son a BA in 6 years. I saved and gave. He worked and saved.

    I once had a younger brother who ‘borrowed’ from me from time to time. After not being paid back after a couple of ‘loans’, I told him I wouldn’t ‘loan’ him any more money. I told him if he ever really needed it, and I could spare it, I would give him money. He never asked again. He got on his feet and took care of himself after that.

    Since then I have stuck to that philosophy, never lend, if asked and I can, I give. This is not an original philosophy. You see it all over personal finance literature. It works for me.

  22. definitely agree with johanna, cosigning for someone with no history but that you know and trust is something my parents did for me and i have done for my brother. ones that cant get one because of their past make me much more leery, but even here, i think i would do it for immediate family.

    Preferred Financial Services

  23. re #13-Sara Bee – I take exception to your first paragraph. The student loan system is in place in large part just because there are families who don’t have enough cash to pay out for college tuition, for whatever reasons – most of which have nothing to do with their level of fiscal responsibility. I would agree that the borrowers (including me and my daughter for her college ed.) have to be realistic about how much they can afford to eventually pay back, but not having the money up front doesn’t make the family a bad credit risk. Not all student loans are for tens of thousands of dollars.

  24. I generally wouldn’t consider co-signing. People should definitely be aware that co-signing means you’re completely responsible to pay off the debt.

    If someone can’t get a loan on their own credit then they aren’t a good risk. I’d rather just gift money to people I love if they truely need it.

    I do think student loans are an Ok exception to the rule. Thats a situation where the parent taking the loan or co-signing can make sense. But I’d only do it if I”m capable and willing to pay off the loan myself.

  25. Back in the 1920′s, my grandfather co-signed on a loan for his brother to buy a car. The stock market crashed, his brother lost his job, the bank called in the loan and my grandfather lost his farm. B

    Not long after that his wife, (my grandmother) died in an accident. My mom was 4 years old – her sister was 2. The Depression was hard, losing their mother was harder. But it was all made significantly more difficult by the fact that their father had to work very long hours at a job in the city instead of being nearby working on the farm.

    We don’t co-sign loans in my family.

  26. Sara Bee, you’ve got another person disagreeing with you. Our credit is sterling — we’ve always paid our bills. (In fact, we’ve only paid interest on a credit card twice in decades — because we were accidentally late.) We also put money aside regularly for two daughters’ college. But our income has stayed steady in the $25,000-30,000 range, making it impossible to save enough. Thus the college loan. (Which, by the way, we’ve been paying off steadily on.)
    You may have to borrow money to go to school. We did; and our kids have, too. The point is to borrow as little as possible, then pay it off as quickly as possible.
    We cosigned with Daughter on the first loan; that’s the one we’ve been paying off on. I wish I could say that she took this loan seriously…but alas. She’s signed by herself on the rest.
    Would I do it again? sure, but with the proviso that we probably would have to pay on it ourselves. Will we co-sign with Daughter again? Probably not until she starts to take this repayment business very, very seriously…thankfully, she seems to be doing just that lately.

  27. Something else you should consider is that you will not know that payments are late until the bank contacts you. Those late payments will be on YOUR credit record. I know this from experience. It isn’t just having to pay for the loan, it’s taking the hit to your credit too. I’ll never cosign again for anyone.

  28. I completely agree. I have a close relative who co-signed on her son’s mortgage and is now in a terrible position. She knew already that he was awful with money but did it anyway. It is likely she will be stuck paying the mortgage, as he is currently unemployed and renting the place out. If the renters leave, he will not have the money to pay the mortgage and taxes. She will end up paying, because she doesn’t want to ruin her credit. It’s an awful situation, and often I think the people who co-sign are people who have a problem saying no to loved ones. At that point both parties are at fault. One takes advantage, the other is enabling. It’s unfortunate.

  29. I agree with your overall philosophy that co-signing for just anyone is a bad idea. However, I disagree with your general statement that bad credit and no credit history are essentially the same thing. Bad credit history means there has been proof that there is have been lapses or problems paying a loan back. No credit history could be because of age (which many people in their late teens and early twenties run into) or because their parents didn’t let them get a credit card when they were 16 (not a bad thing either!) Sometimes it’s better to have no credit or little credit history – some banks will give you a chance to prove that you are responsible instead of assuming you are not.

  30. I actually took a class from Dave Ramsey & learned that FICO is way over-rated. If you have the cash, it goes a whole lot further than credit history. If you have the “want to” to sign on a 30 year mortgage or a 7 year car loan, chances are you can buckle down & save a lot more money thatn you think to be able to wave cash instead credit.
    I do agree that co-signing..for anyone, is 99.9% a bad deal. Being on both ends, it’s not very fun at all. And it ruins relationships.

  31. I agree that no credit history is not the same as bad credit history.

    When we first moved to the US, my parents had no credit history, but they also had no debt and substantial savings in the bank. In order to establish a credit history, they decided to finance their car purchase. The lack of credit history meant that the dealer wanted a cosigner on the loan.

    I can’t say that any of us feel at all charitably towards my cousin that refused to cosign, stating the same “I never cosign” mantra. Telling your uncle, who has watched you waste more money than he would ever dream of doing, that you don’t trust him to honor his commitments, is not a good way to build healthy relationships. There is no way that cosigning that loan would have cost him more than refusing to did.

    I agree with the general principle, but this was my exception that proves the rule.

  32. My father co signed for my credit card when I need the limit raised due to some financial problems I got involved in.

    Recently I paid off the credit card and I have no plans to use it again. I’m going to talk to the credit union about having my father’s name taken off as a co signer even if that means I’ll get a lower credit limit.

    My father co signed because I basically had no credit. Previously I had one credit card that I mismanaged but it was a small amount ($500) and I eventually paid it off.

    I think it depends on the situation. I was honestly in a situation where I needed money and there was no way I was going to get it. But by co signing to increase my credit card limit it meant that I’d be paying back the credit union and not my dad.

    I only made one significantly late payment (rather than just paying a day or so late after my pay check came through). Dad called me on it and that was it. I kept making sure that card was paid.

    No granted for a long time I was just doing minimum payments and then I’d buy something but once I put my mind to pay it off (adn had the financial ability to do that) it took me less than a year.

  33. My parents cosigned on an apartment for me in college, because I would have been homeless otherwise. I had been living at home and going to school when they decided to move halfway across the country in the middle of the school year. A tight rental market at the time meant that even slumlords wouldn’t rent to students without rental history. I’m glad that they decided to trust me.
    Now I’m living in a foreign country, and I bet when I go home my parents will have to cosign on an apartment for me again, though I’ve been renting steadily for 12 years, never missed or been late on a single payment.

  34. A number of my friends have had to ask their parents to co-sign for leases on apartments. In expensive cities like New York and Washington DC in a tight housing market landlords can set a really high financial bar for renters, especially renters with little credit history and no references from prior landlords. A few years ago even young people with good jobs lined up coming out of college couldn’t get a lease without a co-signer in some situations. In general it seemed to work out fine for the co-signing parents of my (pretty responsible) friends.

  35. Another huge drawback to co-signing a loan is that the creditor contacts you only after the payment is due. So you are making the payment late, even if you pay immediately upon notification. At least that’s what happened in my family years ago.

  36. I cosigned for my brother’s Sallie Mae student loans for his first 2 years of college before he had a credit history (my parent’s poor credit wouldn’t allow him to get the loans). Although everything is going great, and he will be able to make his payments when he graduates (whether by himself or with my parents help), he still has 2 years to go and those loans are accruing interest even though they are in deferment. That, combined with my own SM loans that went 5 years in deferment while I was in school, pushed my debt to credit ratio on the “installment” type debt on my credit report to 102%.

    What does this mean? It means that even though everything is going as planned, everyone involved is meeting their credit obligations, and nobody is screwing up, my credit score is taking a hit because I chose to make sure my brother could make his tuition payments the first few years of college. Cosigning is a financial racket that helps nobody but the banks – they get their interest money with or without the cosigner, and cosigning lowers my credit score so they get MORE of my interest money later on if I take out a loan!

  37. #17, Anne, Wow! That is the kind of thinking that has people murdering others to get even generations later because their great grandfather murdered your great grandfather.

    I’m not saying that murder is involved here, but the locked mind mentality is dangerous. As many other posters have mentioned, there are times when cosigning is not a disaster,and can make a huge difference in someone’s life.

    If I used that kind of thinking, I’d be keeping my money under a mattress instead of in a bank because the day before the crash my great grandmother deposited her husband’s paycheck and a large inheritance and lost everything and they had to struggle hard during the Depression.

    Luckily, I look at the situation as it currently is, not as it was three generations ago.

  38. We did this for my brother-in-law. His student loans were so high he couldn’t get a car loan and had a car with over 200K miles on it. So when we went to get a new car, we “sold” it to him for $1000 instead of trying to sell it for the $2000 or so it was worth to a stranger. We simply said, pay us when you can, but deep down, we thought of it as a gift. I told my husband this was the only way I would agree–that if he didn’t pay us back, he had to be okay with it and not harbor any resentment. My husband agreed and my BIL paid us the $1000 in two payments over the next year, and without a single mention or prompting from us.

  39. I had to have my mother-in-law cosign my mortgage, because despite having a $200,000+ a year income and being able to put 20% down, this was going to be my first mortgage ever.

    It wasn’t long after, that paranoia started to get the best of us. If something happened to my income, the bank can take the $260,000 house and go after my mother-in-law for another $200,000, even though the loan was only $200,000. We are now finishing up the process to take my mother-in-law off the mortgage, but it was a long process (and not yet over).

    In the end, the stress makes me almost wish my mother-in-law refused to cosign. Sure, we would have lost $25,000 for walking away from the house, but we’d sleep better if we didn’t have to worry about the bank taking everything from all of us.

  40. I agree with the principle. In practice, things are not that simple. In my case, I have a father in the real estate business who has been a pretty astute self-starter who formed his own business strategy in his fifties, when the company he worked for was closed down.

    The business was building and selling homes. As he got older, he found it harder to obtain the kind of mortgage finance he needed due to the lenders penalizing him for his age.

    At this point I stepped in and co-signed. My options were: keep him in business, by co-signing or support him myself.

    I co-signed. I did it for years.

    Now he’s been nailed by the economic crisis the world is in, and I’m basically being called on to pay up!

    It’s been an interesting experience to say the least.

  41. Most times there should be no exception for student loans either. There generally is always money available for students for school. The reason is that the loans are 1) backed by the federal government and 2) the loans are not dischargeable in bankruptcy (meaning you have to pay them back no matter what).

    The second part is particularly important. Imagine that you are retired on a fixed income. Your child that you co-signed a loan for 1) dies, 2) becomes disabled, 3) can’t find work (which is common in today’s economy), or 4) just chooses not to pay. You the parent are stuck paying this loan under all the above described scenarios. Further, filing bankruptcy to escape the debt is not an option.

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