5 Proven Reasons Why Co-Signing a Loan is Worse than Gambling

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There is only a certain type of person who needs someone to co-sign a loan.

It is a person who is a high financial risk.

When the banks pass over a loan because a person is too high risk, we must take note.

Why?

Because we live in a debt saturated culture. We live in a culture where 8 year olds who make $1 per week can get pre-approved for a credit card with a $1,000 credit limit.

If lending is big business and a lending institution passes over a person because they are a financial risk, what make us think we should help sign for a loan on their behalf?

Important Reasons Never to Co-Sign a Loan

1. When you co-sign a loan, you have the same level of liability as if your signature was the only one on the loan. If your nephew, son, or uncle stops paying, then you’ll be writing a check to cover the payment and expenses. You’ll be the one who is left with a trashed credit score. You’ll be the one carrying the debt burden.
2. When you co-sign a loan, you may be hurting a person more than you are helping them. If a bank thinks that a person doesn’t have a good enough credit history or if a person has too high of a debt-to-income ratio and you help them get the loan, do you think you removed a burden or added one? Many times we expect a loan to be a great thing, but it’s not. If that bank says they can’t afford the payments, then perhaps we should leave it at that rather than helping a person take on more debt than they can afford.
3. When you co-sign a loan, you take more risk than a professional who makes his or her living by lending money. Think about it – the bank lending representative is paid to loan money. If the loaning stops, eventually that person’s paycheck stops. It is in her best interest to sign up as many people as possible for loans. If she determines that the bank won’t take the risk, then why would you?
4. Co-signing a loan may deny you access to your own credit. (This may be a hidden blessing.) Let’s say you go to buy a house and the bank won’t give you a loan. When you ask for the reasons they say that it’s because you have a $20,000 truck loan you’ve co-signed for. Know what? It doesn’t matter. Your name is on the loan so it will be impacted by any effort you make to access credit.
5. Co-signing a loan puts a strain on relationships, not just bank accounts. If you were to co-sign on a car loan for your son and he stopped making payments, do you think that would impact your relationship with him? You bet! What if your son has a good heart and a full intention to pay for the truck, but loses his job? Who’s going to start being responsible for the payments? Co-signing risks relationship.

When you co-sign a loan, you take on more risk and have to carry full responsibility to repay the loan.

Bad idea.

How to Respond to Someone who is begging you to co-sign a loan for them:

• Be honest about your own financial situation. Say, “I simply cannot afford the financial risk right now.”
• Affirm your relationship. Say, “I’d love to be able to help you if I were in the position to do so.”
• Be clear. Say, “It’s not something I’m going to help with. I’m sorry, but no.”

Please don’t let someone manipulate you. If you cannot afford to give them the money, then be firm and say no.

Have you ever had someone ask you to co-sign a loan? How did you respond? Do you regret it?

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