Do Not Co-Sign

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Today I'm posting Proverbs 11:15, a short verse that warns against what we would call co-signing a debt for another person (if you recall, we covered this topic a few weeks ago as well -- looks like the Bible is really making a point about it).  From the NIV:

He who puts up security for another will surely suffer, but whoever refuses to strike hands in pledge is safe.

Next is the Contemporary English Version -- which is (always) more blunt:

It’s a dangerous thing to guarantee payment for someone’s debts. Don’t do it!

And finally, words from the Message, which has a bit of an unusual take on this verse:

Whoever makes deals with strangers is sure to get burned; if you keep a cool head, you'll avoid rash bargains.

We have talked time and time again at FMF about the dangers of debt. It's bad enough when the debt is your own -- but does it sound like a good idea to anyone to guarantee the debts of another person? Yikes!

The reason a person needs someone to co-sign is because a bank has deemed them too risky to give money to. This should be a HUGE warning to you NOT to co-sign for them!!!

The most common situation where co-signing likely occurs is when parents co-sign something for a child who has no credit history. This is ok to do IMO (probably still not wise, but ok to do) as long as you have the ability to pay the debt back completely yourself. When you sign it you should be thinking that you're signing up to pay the entire thing. Don't sign with the thought that you'll never pay a penny on it. If you can go into the arrangement that way and are ok with it financially, then I think it's ok to proceed.

Thoughts and comments?

Comments

[Lance @ Money Life and More]

If you aren't prepared to pay the debt yourself don't co-sign. I personally will hopefully never co-sign because I wouldn't want to ruin relationships and be on the hook for the debt but everyone is different. So if you're OK with paying the debt and don't think it'd ruin your relationship I think it is OK to co-sign for a kid with no credit history but be prepared to take over the payments (and hey, if you do that you should get the car/degree or whatever those funds paid for!)

[Romeo]

But wouldn't this mean that the entire banking system as we know it shouldn't exist? Those who take this verse literally should look at it from both perspectives, right? Banks co-sign all of their mortgages (by way of using it a collateral) and we co-sign for banks when they turn around and package our mortgages as collateralize debt. To support the bank's business model, but not our own doesn't seem consistent with this scripture, at least the modern day translation. Perhaps the suffering is only referring to the mental suffering of "when am I going to get my money back, what if this person defaults, etc." The scripture may not necessarily mean not to co-sign. People need help sometimes, and co-signing may be the best Christian thing to do, as long as the co-signer is prepared to mental "suffer."

[FMF]

Romeo --

Believe me, it means not to co-sign. If you search the Bible, you'll see that there are other, very similar scriptures that give the exact same message.

[Elizabeth]

I agree 100% . Just having that conversation with my daughter this morning. I don't want to be in debt for possibly the next 10+ years paying back a parent plus loan with no guarantee of her taking over the payments or even being able to afford to make the payments. I am working very hard to get out of debt and I want to keep it that way and begin to live a debt-free lifestyle. If I go into debt again, it will be for me and me only and not someone else (not even my child).

[Wayne]

I don't want to cosign for my children, but believed I needed to help them get start with their credit history. I have given each of our children $500 to open up a guaranteed credit card account. It gives them a chance to develop their own credit card history. If they make a late payment it affects their own credit history.

[C]

I don't like the idea of cosigning for anything but it's hard to get student loans at any age or with any type of credit without a cosigner. I think the banks need to relax their standard for student loans or get out the business if they can't handle the risk.

[jim]

C, you don't need a co-signer for Federal Direct Loans like Stafford. I think its only the private loans that require co-signers.

[JayB]

I think a nice rule of thumb for co-signing would be based on an age limit. Anyone 25 or older in my opinion is just out of luck. Child or not, at that age, one should have had a chance to get through college or get into whatever field or work they do to make a living. By law your an adult at 18, but most still stay with parents to get on their feet, especially in the last 10 years or so. Most everyone I know in the age range of 18-25 are still very much dependent on their parents, and that's probably normal. But if they cannot afford something and they are past the age of 25, then they might should do without. At that point they have been an adult for 7 years, and/or had a bachelor's for at least 2 if they took school halfway seriously. At this point they are doing something wrong if they still need a co-signer in my opinion.

[michael]

I did it once...lesson learned. stay away from it at all cost. Not worth it. I was not in the position financially or mentally to take that on. I thought I was just trying to help.

[[email protected]]

Of course its not worth it unless its your children. Still then, they should know that a cosigner does not mean that the parent will be paying off even half of that debt-its on their shoulders only. I don't think I would ever trust anyone enough to pay off a debt that had my name attached to it.

[Georgia]

I have taken your advice that when you give to family, make certain you consider it a gift. Even my kids mean to do well, but live far away and have different expenses, expectations of life, etc.

I was once told I should not help my adult child who lived several hundred miles away. But I felt it necessary. They were working 2 full time jobs and still not able to make it. And they were hard jobs. They were making a huge effort to get ahead and I felt fine to help them.

[adam smith]

Don't cosign for them? Has it ever occurred to you that people make mistakes but still deserve to make up for that and have a place to stay? What's everyone with bad credit supposed to do, move into homeless shelters?