Co-Sign a Loan and It's All But Certain You'll Lose!

Money is the best deodorant. ~ Elizabeth Taylor ~

As 'Liz' points out, money gives off a certain scent, and when people get a whiff of it, you can bet your bottom dollar that you'll attract certain folks. These people just want to borrow a few dollars, and they're even quite willing to pay you back... with interest... so where's the problem?

Unless you're ready to write it off, do not under any circumstances lend family and friends money. That especially means co-signing for loans. Period. Here's why. You cannot win. You cannot come out ahead. You have everything to lose and nothing to gain.

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If you get paid back then you simply avoided a potential catastrophe. If you don't get paid back (which may very well be the case) your relationship will never be the same. It usually results in irreparable damage.

"Oh I don't want you to give me any money, I just want you to co-sign for a loan!"

That's even worse!

Banks and financial institutions are professional money lenders. That's what they do. In the same way that Major League Baseball players are the best in the world at playing baseball, bankers and lenders are the best in the world at lending money and evaluating risk. If a friend or relative asks you to co-sign on a loan it can only mean one thing - the banker or lender doesn't like the odds of getting their money back. In fact, they think their chances are so slim they are saying flat out "No!"

So is that a good reason for you to step in? You're not stupid. You know full well that your relative or friend is a bad credit risk and yet so often, we reluctantly agree to sign. Why?

Your left hemisphere, logical brain, knows that this is a bad move. Your right hemisphere, emotional brain says "Oh he's a good guy, things will work out in the end." Parents sign for their child to buy a car, or a house so he can learn to be responsible. Hmm. Responsibility might be better learned the way you learned. Save and manage your money and voila, you'll have enough to buy what you need on your own.

You should be aware that co-signing can go a lot deeper than just agreeing to cover the loan.

Not too long ago a friend of mine (I'm told he's now an ex-friend) called and asked me to co-sign for a new mortgage on the house that he and his girlfriend lived in. Here's the scene.

Over the course of the past year or so, my friend and his girlfriend had missed a number of mortgage payments. The bank was tired of chasing after their money so they called the loan. My friend quickly scouted around and found a lender who was willing to take the mortgage - and give my friend access to ninety percent of his remaining equity - provided he could find a co-signer.

My "friend" then called to tell me the good news. He had found a new mortgagee and all he needed was for me to agree to co-sign on his girlfriend's mortgage. (If you're wondering why my friend's name wasn't on the mortgage it's because he declared bankruptcy several years earlier and was forced to put the house in his girlfriend's name.) It gets better.

My friend further explained that this was a "really good deal" because the new mortgagee required a much smaller monthly payment than the present mortgagee. In fact, with this smaller monthly payment, and up to ninety percent of the remaining equity available, they could use the equity to pay the monthly bills. As he explained, it was as safe as houses. How could they possibly miss a payment? "Think about it," he enthused, "it's a complete no-brainer."

To further see how delusional some people can get, my friend hasn't held a job in six years, and from all indications at the time he called, he hadn't the slightest intention of getting one.

To be fair, I don't think my friend really had any idea of what he was asking me to do. He "really believed" that I would suffer no more inconvenience than having to go through the trouble of scrawling my name on a piece of paper. In reality, by co-signing that loan I would have been bringing a mountain of responsibility and aggravation on my head.

As a co-signer you are stating that you will take full responsibility for the entire matter. In effect, even if everything goes according to plan (and it seldom will) co-signing can have a devastating effect on your own finances.

As a co-signer the liability immediately goes on your credit record. In fact, this could prevent you from getting a loan, or your own mortgage, because a creditor considers the co-signed loan as one of your obligations - and make no mistake about it, it is!

If you co-sign and your friend misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased by late charges and attorney's fees if the lender decides to sue for payment. If the lender sues and wins, and he usually will, your wages and property may be taken as payment.

If you co-sign for a car for example, the lender will not contact you when the loan is late, and when it is, it's your credit that's damaged. The lender won't bother to contact you when he's had enough of chasing your delinquent friend and decides to repossess the car. You will be greeted be a default notice and have a 'repo' on your credit report. The "nice notice" in the mail will inform you that you are a deadbeat who owes money on a car you never drove. The lender will make a quick sale, usually well below cost, and come after you for the difference - including legal fees!

On the outside chance the lender does contact you before he repossesses the car, there is nothing you can legally do to force a sale because you don't own the car; the only thing you own is the responsibility. Co-signing for a house is exactly the same play but on a potentially much larger scale.

You're probably wondering what I told my friend. Did I jump at the no-brainer opportunity? No, not quite. I told my friend that I wasn't comfortable signing on for his girlfriend's mortgage and that he would have to look elsewhere. His response... he hung up. I've been told through the grapevine that he will never talk to me again.

I have to admit I did give the matter some further thought but ultimately concluded that I simply don't need or want "friends" like that. After all, what was he saying? He was in effect saying that in order for our "friendship" to continue, I was not allowed to make my own decisions concerning my money and my future. Anyone else, a bank, a lending institution, or another acquaintance is allowed to make a prudent business decision and decline his "offer", but I, as a "friend", am not entitled that same right. I was given an ultimatum - either co-sign for the loan and take the consequences or in his opinion, we're no longer friends.

The more I thought about my decision the better I felt about it. I concluded that if he had the "nerve" to ask such an outrageous favor, I should have no problem having the nerve to decline. And neither should you. If that's the price or condition of friendship, you may want to reevaluate your relationship.

At some point in your life, you will likely be asked to lend or co-sign for someone. Here's my advice. If you can afford it, and you want to do it, simply give them the money. No loan, no written agreement, no worries of being paid back. This method will keep your relationship in tact.

If you can't afford to give the money, then respectfully decline. If you go against this advise and you do lend the money, be fully prepared to write-it-off. There's the old line; "I lent my brother-in-law a thousand dollars and I never saw him again. Best thousand bucks I ever spent!"

If you truly want to help someone then simply give them the money. If you don't have it, then don't sign up to pay because in all likelihood you will!

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