Another Example of Why Not to Co-Sign a Loan

Bankrate tells the story of a poor sap who co-signed a loan for his friend and is now left holding the bag. The guy writes:

A so-called friend wanted to get a car and he couldn't get approved for a loan. So, I did him a favor and co-signed for him. It hasn't even been six months yet and he returned the car to me.

The dealership was so slick that they had put me as the main person on the loan, which I was told was just to co-sign for him. I don't want this car and already have my own car loan. What should I do?

Bankrate responds with the facts:

When you co-sign for someone, you are telling the lender you'll guarantee payment on the loan. The order in which your name is listed on the loan does not matter. When the payments stop, the lender will come after you, because the lender made the loan on your say-so.

Consider this my semi-annual suggestion that you NEVER co-sign a loan for someone unless you're 100% committed to taking on the loan yourself (I wouldn't even do it in this case, but you can as long as you realize that you're committing for it yourself.) The reason you're signing in the first place is because the person is a bad risk -- they can't get the loan on their own. This alone should be enough to tell you to stay away from it. If a bank won't give them money, why should you?

If you must do something, how about giving them some money to help them buy the item? Yeah, you may be out some cash for sure using this suggestion, but at least you won't be on the hook for the whole loan if (when?) they default on it.

Comments

[Melvin J. Richardson]

I used to be a debt collector years ago and I would often call the co-signor on a loan and their first response would be that's not my loan "I only co-signed." Then I would have to go through the long explanation of what it means to co-sign for a loan. Same explanation as above.

I can relate to the post above.

[Travis]

I know this is not Sunday but I just had to say that this is another example of the time tested wisdom of the Bible. Proverbs 17: 18 reads "One who has no sense shakes hands in pledge and puts up security for a neighbor".

[Khyron]

Heh.

Well, I co-signed for a loan recently for someone that I thought was a friend and has proved duplicitous. I'm not sore about it. I knew what I was doing. The original idea was that I was helping this friend stay in school through the end of the spring semester. However, she dropped her end of the bargain when she decided to return to her boyfriend (whom she had dumped because she said she wanted to be with me).

Anyway, I did this to help a friend as I've helped friends in the past. The amount in question - $35,000 - is an order of magnitude larger than anything I've done for others. However, the idea is the same.

Why did I perform this act of idiocy, you ask?

1. To help a friend. Obviously, this person is no longer a friend in my eyes.
2. The loans are education loans, so repayment doesn't start until 2010. This gives me time to build up resources to pay them off in full, if necessary.
3. The interest is tax deductible. I'd prefer not to worry about it, but if I have to pay, at least there is this minor benefit.
4. It should actually help my credit score some, by increasing the credit diversity. I never took out loans for college (which I didn't finish, so whew!). I only owe debt on an AmEx which I will start aggressively paying down in a few weeks after my $20,000 emergency fund is topped off. Outside of the college loans I co-signed for, and the credit card debt which I am fully responsible for, I owe nothing to anyone. My only other credit card is is ice in my freezer, paid off for over a year. My car has been paid off since 2002 (3 years early). I have no mortgage. So this loan actually may have had a positive impact on my already high credit scores (750 - 800 range before the loan).

Actually, while I hate being screwed, I have to admit that I find the whole thing amazing for a different reason. I'd already known this girl is a sociopath. This act cemented that. However, karma is a b!tch. I may not ever see her again, and in fact, that wouldn't be a bad thing, but I think her duplicitous nature is catching up with her faster than she realizes. I hope I can watch, just to find out how the story ends. I've forgiven her.

A different kind of co-signer story. Would I do it again? Depends on the person. I was far too trusting of this female, and I accept responsibility for the consequences of being so. For my best friend, or my sister, I just might do it. (Not likely before the existing debt is paid for though.) I would, of course, get it in writing next time. That was my biggest mistake, I think.

[kitty]

Very very stupid. The better way to help would've been to get the car in his own name then sell/lease it to his friend so that the friend makes payments to him. This way, if his friend failed to pay he could've reposessed the car and sold it. Not everything, but at least some money.

I'd never cosign a loan. I will and did lend money directly to very select friends at either no interest (very short term) or normal CD interest (longer than one or two months). I've not had problems, but these are friends I've known for years; same friends who called me up when I totalled my car and offered to lend me money if necessary. I will give money (within reason) no strings attached to some cousins if needed.

@Khyron - you are an extremely generous person, and your ex-girlfriend is a fool in addition to being a sociopath. It's much better for you that she left you - you don't want to be with someone that dishonest, but this is a huge amount of money. Could you sue her or it isn't possible if you co-signed rather than give it directly?

In future, if you want to help someone, it's better to either lend them money directly with appropriate documentation than co-sign. Or if it is for something like a car or a home - buy it in your name than finance it for them. This way you can at least get something. Just a humble opinion.

[fathersez]

I think co-signing or guaranteeing a loan is worse than being a borrower. You get all the liabilities but non of the benefits.

Many parents who cosigned for children, and like Khyron here, friends signing for friends, by and large learn the hard way.

This is just being finacially iliterate.

[jack rowsey]

I heard and watched so many problems caused by co-signed loan.
It is very risky. Maybe you want to help someone, but you should remember to help yourself by never agree to join a co-signed loan.