The Bible and Conventional Wisdom Agree: Don't Co-Sign a Loan (And What You Can/Should Do Instead)

The other day I ran into this piece from Kiplinger's that talks about why you shouldn't co-sign a loan:

The loan you've co-signed for can show up on your credit report, just like any other debt you have. As a result, the loan you've co-signed for can increase the size of your outstanding debt -- added to your mortgage, credit-card balances, car loan or student loans -- when lenders are deciding whether to let you borrow more money. You might have a tough time taking out other loans if the lender decides that your debt-to-income ratio or balance-to-credit limit is too high -- even if the payment history is perfect.

Any late payments can show up on your credit report, too, sometimes without warning. Some lenders may notify co-signers and give them an opportunity to pay before reporting it as late but generally aren't required to give any notice. And if the borrower defaults on the loan, it can destroy your credit -- showing up as a default for you, too.

Because so much is at stake, it's usually a good idea to say no if asked to be a co-signer. And even if you'd really like to help, first step back and assess the risk -- even if it's your child or a close family member who is asking. "Think like a lender," recommends Pamela Rooney, director of retail credit products for Wachovia. "Think about whether that person has the wherewithal to repay it. From a consumer perspective, it's your money as well as your credit history on the line."

This thinking is in agreement with what the Bible has to say about the issue. For reference, consider these verses:

• There’s danger in putting up security for a stranger’s debt; it’s safer not to guarantee another person’s debt. Proverbs 11:15 (NLT)

• A man lacking in judgment strikes hands in pledge and puts up security for his neighbor. Proverbs 17:18 (NIV)

• Do not be a man who strikes hands in pledge or puts up security for debts Proverbs 22:26 (NIV)

Why does the Bible warn against co-signing? For the same reasons noted in the article above. In addition, when you co-sign you may not have a clear way to pay back the money if the debt falls to you, which also violates what the Bible says about managing debt.

So what are the alternatives? Here's what you can do if someone asks you to co-sign for them:

1. You can decline. (Politely.)

2. You can buy the item for them.

3. You can give them the money and let them buy the item.

Comments

[Big Cajun Man]

As Shakespeare also said

"Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry."

Now if the Bible and Shakespeare BOTH agree, then maybe we should take this much more seriously!

--C8j

[Christian Finance]

Amen, I completely agree with you! I've known too many people who have been burned by co-signing a loan and stuck with the payments. Thankfully, some of those people also could afford the payments but that is not always the case. Be very cautious when you co-sign and try to avoid it especially if you don't know the person's character.