It’s invariably happened to you or someone you know: Someone asks you to co-sign on a loan for them, whether it’s a car loan or a mortgage (but more often than not, it seems to be a car loan).
It begs the question: Should you co-sign on a loan? Ever?
The folks who will actually have the gumption to ask for your John Hancock — and the use of your credit score — for a loan are usually family members and close friends. Invariably, it’s a car loan or a personal line of credit. While they’re not asking you directly for the money, there could be some financial repercussions down the road if they default on that loan — and drag your credit score down in the process.
Once your credit score drops due to their inability to make payments on the loan, it will be YOUR problem when you need credit.
The one (and probably only) thing that my father would never do for us kids is co-sign a loan. And we can’t blame him. Any financial sins on our part would drag him down with us — a missed payment on a loan account negatively affects ALL co-signers. The creditor doesn’t care who is “in charge” of paying the bill; they just want it paid. ON TIME.
A loan is a legal contract — not something to be trifled with.
Is There a Solution?
If you really want to help out your family member or friend financially, you can do one of two things — or both!
1) Loan them your own money for the purchase. But instead of risking your credit score, you’re now risking your hard-earned cash. There’s no guarantee that you’ll ever see any of that money again, although that’s the pessimistic view. To help insure this “investment,” have a lawyer draw up a simple loan/payback agreement so it’s on paper. That way, if things go awry, you may have some legal recourse. While you might get your money back, you’ll likely become estranged from whoever you’ve loaned the money to.
2) Help them improve their financial situation — and their credit score. If their score is too low to qualify them for the loan, there’s a more pressing issue to address: A craptastic credit score. That’s what is really holding them back. Instead of sacrificing your high credit score, help them figure out what they can do to improve their own. Perhaps it’s debt overload, or they’re a chronically-late bill-payer. Either way, they’ll need to repair their finances. Learning financial responsibility can only help them in the long run.
Have you had family or friends put you in this position before? How did you handle it when they asked you to co-sign a loan?