Why You Should Never Co-Sign (And 6 Things to Do Instead)

Type “Why Co-Signing” into Google and you will quickly see the suggested searches start with things like:

“Why co-signing is bad”

and

“Why co-signing is a bad idea”

Have you ever co-signed for someone before?

Or have you ever had someone co-sign for you?

Let’s see why it’s so bad and what you can do instead of co-signing for a friend or family member…

What is Co-Signing?

Co-signing is a simple process of signing on the dotted line for someone’s purchase. Usually for a loan. Most popularly, a car loan.

If the person pays the loan, you are good to go. You will never pay anything.

However, co-signing is a bad idea because of what happens when they don’t pay. And there is a good chance that they won’t.

If someone needs a co-signer, that means that the bank thinks they won’t pay the loan.

You won’t need a co-signer if the bank trusts you.

What You’re Agreeing To

By signing for someone else’s loan, you are guaranteeing their debt.

In some states, the lender can actually come after you before they try to get the money from the person who actually received the loan.

Why would they do that? Because if you have the credit to co-sign, you’re more likely to pay than the actual borrower.

Your responsibilities should be spelled out in a co-signer agreement. You will see things like this:

“You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.”

Just know that when you co-sign, you are legally responsible for that debt.

If You Still Decide to Co-Sign

There are some situations where you may want to co-sign. Most commonly when your child needs wants their first loan.

I have still heard horror stories, even when people are dealing with their own children, so beware!

I also have a good friend who co-signed for his own father. My friend is now paying the bill on a car that he never sees. Sadly, he never sees his father either.

Here are some things to consider if you decide to do it:

• Make sure you agree with the purchase
• Make sure you can afford to pay the loan
• Make sure you will be notified if they don’t pay
• Make sure you understand all the consequences
• Make sure you read your state’s laws on co-signing

6 Things to Do Instead of Co-Signing

Most of the time, people will understand why you don’t want to co-sign for them, but sometimes they won’t. It’s possible that you can actually lose friends, because you choose not to co-sign.

That, however, is ridiculous. And you should probably be questioning the integrity of that friendship if you lose them over something like this.

It’s like the old saying “if you loan $20 to your brother-in-law and you never see him again, was it worth it?”

I’m a positive person, so I don’t want to leave you with all this negativity of what you shouldn’t do…

Here are some things you could do instead:

1. Explain why it is such a bad idea
2. Suggest they not take the loan at all
3. Explain why they shouldn’t co-sign either
4. Help them learn to save for big purchases
5. Explain that your relationship is more important
6. Direct them to this blog for help with their money 😉

What If You Already Co-Signed?

Alas, if you are here and you are dealing with a “co-sign gone wrong”, you have some options.

Here are some things you can do:

Attempt to work out a payment plan with your friend/family member. If you are still in contact with them, they may be willing to at least help pay the loan, since they can’t pay it in full.

Call the lender and negotiate the agreement. The lender may be willing to work with you, especially if you aren’t able to pay. They would rather get something, than nothing. You may be able to negotiate a lower interest rate and/or lower the balance.

Stay disciplined and learn from this. It may have been a bad idea for you to co-sign, but you can’t change the past, so why not learn from it? Now you will never do it again. The good news is that this can be the last time you make this mistake.

We can overcome almost anything if we take responsibility and just do it!

Photo Credit: Daniel, Sara, James, Danny