The following is a guest post from Tiá Jones, MBA.
Picture it. On a blistering cold evening in the winter of 2005, I received a frantic phone call from a family member whose loan application had just been denied.
To protect the indigent, let’s refer to this family member as Larissa. Unable to obtain law school financing due to her poor credit, Larissa contacted the only relative (albeit a single mother of a one-year old son) who could solve her problem.
Other family members were undesirable credit risks, i.e, plagued by bad credit. I was the only one stupid financially stable enough to cosign a student loan of a whopping $40,000. With a 7.5% interest rate, no less.
Fast forward to 2009. Still a single mother, but a newly minted MBA, I was all fired up to purchase my first home. With a 741 FICO score, decent savings, and preapproval letter in hand, I found the perfect place. I even managed to negotiate $14,000 off the asking price. I paid for inspections, gave my landlord notice to vacate, then packed up my belongings and put them in storage.
Days before closing, I discovered there was one stipulation remaining on my file. Out of the blue, this $40,000 student loan – which, according to my inexperienced loan officer, would be a non issue – stood between me and my dream home. After a meticulous review of my file, in the same fashion and passion as Suze Orman, the underwriter sent me an e-mail:
“YOU ARE DENIED! YOUR DEBT-TO-INCOME RATIO IS TOO HIGH!”
There is a happy ending to this story. At least Larissa can call herself a lawyer now. I, however, am forced to look for an apartment rental because my son starts school in 8 days.
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I won’t put you to sleep with all the gory details of this financial blooper. I fear the final tally will cause me to lose my lunch, but here’s a rough sketch of what it’s cost me.
So if my story wasn’t enough to convince you, I want to provide the top 4 reasons you should never ever cosign a loan.
- People who need cosigners need them because the lender doesn’t think they’ll repay the loan. When have you heard of anyone with a good cosigning experience?
- No one is worth risking your financial future (maybe your kid or spouse, but – eh – maybe not).
- Cosigned debt is 100% your debt. If the primary borrower defaults or dies, you’ll be the one paying for it.
- As evidenced by my experience, this debt is factored into calculations that determine whether you’ll get approved for a mortgage.
If you found this article after cosigning someone else’s debt…I feel sorry for you, but here are some things that you can do.
- Take out a term life insurance policy on them. Their death doesn’t release you from paying off the debt.
- Stay on them. Constantly remind them to renegotiate, refinance, and remove you off the loan.
- Check your credit score. The loan may affect your ability to purchase large items such as a car or a home.
- Call the lender. Find out what can be done to release you from the loan.
- Make sure they’re making the payments on time. You might have to step in and make the payments to save your credit.
- Don’t kill them. I thought this was worth mentioning after number 1.
Sometimes helping others achieve their dreams may cost you your own. Spare yourself the trouble, and learn from my mistakes.
Tiá Jones is President of New Legacy Services, LLC, a small business coaching and consulting firm. Her clients include YouHaveMoreThanYouThink.org and SistersSpace.com. When she is not trying to change the world through entrepreneurship, she blogs about event planning and all things pretty on TheHostessChick.com.