Finance Question #15 - Should I cosign on a loan to help someone in need?
When you cosign for a loan you are promising to pay off the debt if that person cannot make their payments. This is a kind act that can help a friend or relative get approved for a loan, but you must consider the risk involved with cosigning for a loan.
What does it mean to cosign?
Cosigning stems from when a person cannot get approved for a loan. The reasons can be that the person does not have enough income to cover the payments, or most commonly the person has bad credit. Many lenders render the option of obtaining a cosigner for individuals who otherwise cannot get approved on their own. When you cosign for a loan you are taking on full responsibility for the entire loan if and when the borrower cannot make the payments, in which case there is a good chance of this occurring seeing as though the borrower already has a bad payment history. You will be legally obligated to pay off any late payments, late fees, and will be expected to continue making payments until the loan is paid in full.
Cosigning means that you will be signing the loan documents along with the borrower.
The Risks of Cosigning
It may be a good deed to help someone with a loan under certain circumstances. For example; Let's say someone dear to you is currently going through a financial crisis in their life and they are behind on their car payments, a vehicle in which they rely on to get to work. You know for certain that this person is a hard worker and will do everything in their power to pay you back for helping them with their car payment. In this situation, it may be okay to help them with their car loan payment, but cosigning for someone takes things to an entirely different level in regards to helping someone with their loan.
To cosign, or not to cosign...
This brings us back to the original question: Should I cosign on a loan to help someone? The simple answer is absolutely not, under any circumstances, should you ever cosign on a loan for someone. Think about it, if the bank doesn't deem the borrower to be financially responsible enough to take on the loan without a cosigner then why would you trust them? Once you cosign on a loan you have entered into a long term agreement as to the responsible party for the loan. You are placing your financial well-being at risk. What happens when the borrower can't make the payments? Do you have plenty of room in your budget to take over the loan? What happens when you yourself get into a financial crisis? Not only are you responsible for your own debts, but you are now also responsible for the cosigned loan.
The bottom line is that the best way to help someone in need of a cosigner is to first know how to say the magic words "absolutely not". Secondly, help them to actually get their finances in order. Teach them how to budget, teach them how to live below their means, and explain to them the wrongfulness of taking on loans they are not equipped to pay. They will be so much better off in the long run. Agreeing to cosign may very well only add to the borrower's already existing problem. Do not be apart of the problem. Be a part of the solution.
Take charge of your money!
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
Prior articles in this series
MONEY QUESTION #1 - Do you live for today, or live for tomorrow?
MONEY QUESTION #2 - Should I "loan" money to friends and family when they are in need?
MONEY QUESTION #3 - Did grade school (K-12) teach you anything about money?
MONEY QUESTION #4 - Why do I need an emergency fund?
MONEY QUESTION #6 - What is the difference between financial security & financial freedom?
MONEY QUESTION #7 - How can I improve my chances of getting a credit limit increase?
MONEY QUESTION #8 - How much emergency money is needed?
MONEY QUESTION #9 - When Should I Start Saving for Retirement?
MONEY QUESTION #11 - How do I get paid what I am worth?
MONEY QUESTION #12 - I want to buy a house, now what?
MONEY QUESTION #13 - Should I pay off my highest interest debt, or my smallest debt first?
MONEY QUESTION #14 - Should I pay off all my debts before I begin investing?