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4 Reasons You Should Never Cosign A Loan

by Shawanda Greene

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.

****Article continues after advertisement****


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.

LoanCosts

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.

  1. 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?
  2. No one is worth risking your financial future (maybe your kid or spouse, but – eh – maybe not).
  3. Cosigned debt is 100% your debt. If the primary borrower defaults or dies, you’ll be the one paying for it.
  4. 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.

  1. Take out a term life insurance policy on them. Their death doesn’t release you from paying off the debt.
  2. Stay on them. Constantly remind them to renegotiate, refinance, and remove you off the loan.
  3. Check your credit score. The loan may affect your ability to purchase large items such as a car or a home.
  4. Call the lender. Find out what can be done to release you from the loan.
  5. Make sure they’re making the payments on time. You might have to step in and make the payments to save your credit.
  6. 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.

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{ 47 comments… read them below or add one }

Pete August 19, 2009 at 11:07 PM

sorry to hear about your bad co-signing situation – but sadly – like you mentioned – people usually need a cosigner for a reason.

I have a rule – i never loan money to family or friends, and i never co-sign on a loan. If someone really needs help, i might give them some money, but no loans. Thankfully I didn’t have to learn the hard way like you did Shawanda.

Reply

Shawanda Greene August 20, 2009 at 12:05 AM

Fortunately, this isn’t my story. I should probably write an excerpt at the beginning to clarify that this is a guest post.

I don’t loan money to family or friends either. Even before I made it a rule to not loan money, I wouldn’t loan what I couldn’t afford to give. People with bad credit tend to not pay you back. I’d hate to lose a relationship over money.

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Torrey August 20, 2009 at 5:08 PM

Great post Tiá! Many people what want you to cosign not only have bad credit many times, but probably live beyond their means. I know a guy who has a 2007 or ’08 Chevy Tahoe that he had to have a family member cosign for. Not only does he have bad credit and live beyond his means, he lives in a run down apartment.

He made this purchase to impress people (mainly women in my opinion). But the sad thing is he lost his job about 6 months ago and now is behind on car payment ($800/mo), insurance and has expired tags and registration. What a way to thank your family member for their kind gesture!

Prime example of why not to cosign! Gives me the hives just thinking about it.

Reply

Shawanda Greene August 20, 2009 at 8:12 PM

When I was a kid, my dad cosigned for his stepson’s car. Of course the stepson defaulted on the loan, and the car ended up getting repossessed. Subsequent to that, my dad bought a car for my brother. I believe the car loan was to be paid back over four years. Eventually, my dad paid the loan off completely. It couldn’t have been more than two months before my family and I woke up to find my brother’s car missing from our driveway. It’d been repossessed! Apparently my brother’s car was collateral for my dad’s cosigned loan.

It’s weird, but it happened. That’s always stayed with me: NEVER COSIGN LOANS.

Reply

Tia August 23, 2009 at 12:11 PM

Ouch! Atleast it was for her education. But I will no longer cosign, lend, or do business with family.

Reply

Torance August 20, 2009 at 9:51 PM

I love this post and agree with never cosigning! You shouldnt even loan people money unless your prepared to not get it back. Thankfully Ive never had to cosign and thanks to this story I never will…lol

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Donna Freedman August 23, 2009 at 4:33 AM

Oh, Tiá, I’m so sorry that this happened to you. Um…did you contact the defaulting family member? What was her excuse for not paying back the loan? And if there is no good reason (e.g., massive illness that has left her incapacitated) how can she live with herself?

Reply

Tia August 23, 2009 at 12:07 PM

Hi Donna,

She has not defaulted, she just graduated and is within her 6 month grace period. Banks require a 12 month deferment or proof of payments in order to not count the debt. Her servicer would not let her extend the grace period until November. Its more so a timing issue (the inexperienced loan officer should have known this up front). I’m giving her a few months to get on her feet and then I will hound her about the consolidation.

Reply

Cooke N. Mazder September 1, 2009 at 12:40 PM

Sadly, I can relate to this post. My family member was just ending a marriage and had savings (later found out it was a settlement) that was not enough to restart her life. Fast forward to that faithful day when I checked my credit report out of the blue. I was angry and shocked into tears but refused to pout for long. I took action by forcing her to get crap together IMMEDIATELY. I didn’t care how the late payments happened or why. I just wanted the monkey off my back. Today, I don’t loan money per se. I say its a loan but I don’t expect repayment. As for co-signing – HA! Its time I made my financial independence priority. But as with most things in life, its easier said than done.

Reply

Shar November 19, 2009 at 6:42 PM

My story would have been similar to the above.
Firstly, it was a hot scorching day in July, when
my cousin upon her return from a family reunion, looked
out her window the very next day and saw her car had
been REPO'D. That very same day she emailed me stating
that in her rush, she had forgotten to pay the note and now behind. The
Bank told her that in order to get her car back, she needed $16,000.00 or
a co-signer on a loan. That her sister was trying to help but come to find out – her credit was already over-extended. Enter (cousin) –>ME–<. She emailed me with the above pitiful explanation
asking me what ever I needed from her to make this happen (get her car back), to "just ask".
HA! Nice I may be, but stupid, I very well am NOT! I turned her down easily,
telling her that I never co-signed for anyone, and the most money I'd ever
lend a person is $20.00. End of story! To make a long story short, what actually happened
is she went to the family reunion trying to play big man on campus and instead of paying
her note, she took the money meant for her note as spending money while she was
out of town at the reunion. Lastly, let me just say – she is NOW WALKING and
I have peace of mind!

Reply

TheyCallMeCheap November 23, 2009 at 3:37 AM

Love the $20 cap on loans. I loaned a cousin $20 back in 1999. I have neither seen nor heard from those $20. Before taking the firm position against loaning money, I decided I wouldn't loan money I couldn't afford to give.

I'm glad you didn't agree to cosign for your cousin. I seriously doubt she was only a month past due on her car note. If someone doesn't care about their own credit, they sure as heck aren't going to care about yours.

Reply

michael January 9, 2010 at 6:03 AM

Sorry to heard about your cosigning experience. It was truly sad. I will tell your story to my mom because her friend ask to be a cosigner.

Thanks for sharing this to give us a lesson and advise.
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Reply

Milat Maho June 2, 2010 at 3:07 AM

Too bad that this has happened to you. It really cost your dream just to help others achieved their dreams. I thank you for sharing your experience so that I can keep in mind what will happen if you co-sign a loan.

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joshdecore December 8, 2010 at 11:24 AM

Your hardship letter to your mortgage lender may be one of the hardest letters you ever write but it doesn't have to be this way. I understand the feeling of helplessness when facing foreclosure and thinking how can you can get help from big lenders that have been receiving billions of our tax dollars.

Reply

how to fight January 18, 2011 at 5:11 AM

It happens all the time. I remember meeting a 41-year-old photographer who had recently divorced and inherited $21,000 of his ex-wife's debt. A friend who thought he was involved in a great relationship started picking up the tab for his soon-to-be ex-partner. A parent co-signed for a credit card for her college-age daughter and is now stuck with $30,000 in credit-card debt.

Reply

how to punch January 18, 2011 at 5:18 AM

If the primary borrower gets behind in payments, the bank will come after the person they have the greatest chance of collecting from.

Reply

how to make a tutu January 18, 2011 at 5:20 AM

When you co-sign a loan, you are signing a legal contract that holds you responsible for the entire debt, say consumer credit experts.

Reply

Interesting Books February 28, 2011 at 5:57 AM

People with bad credit tend to not pay you back. I'd hate to lose a relationship over money.

Reply

debtfreedivas March 5, 2011 at 12:25 AM

Wow! We just did a show called Cosigning Your Life Away!! This is a must read. I have to share this one!!!

Reply

TheyCallMeCheap March 8, 2011 at 8:12 PM

Thanks for spreading the word!

Reply

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Reply

breonna January 25, 2012 at 9:53 AM

My mom has horrible credit and sad to say, lives above her means. My mom, who already has 3 cars, somehow went to a car dealership and decided to purchase yet another car. Well shes unemployed and has horrible credit and decided that I would put the car in my name since I have good credit and -ching- ching- a job.

At first, I went along with it due to she being my wonderful mother who has purchased me 2 cars in my life (one at 16 and the other at 21) but then I got the thinking… my mom doesnt have a job or a source of income, how is she gonna pay these car bills?! my mom has horrible credit because of not paying her bills! my mom borrows money from me all the time and never pays me back!

Of course my mom was very mad when I decided I wouldnt put this new and unnecessary car in my name. everything she has ever done for me was thrown in my face… but I just couldnt swallow this huge risk (and honestly, what would end up happening is I would be the one to have to pay that car note because my mom always feels like i owe her)

I have been a fool too long with my money. I let an ex borrow $2000 to get his car repaired and of course, I didnt get that back. (What the hell was I thinking?! He had bad credit for a reason!)

My mom has borrowed $1500 from me and I didnt get that back.

At one point in time, I had 4 credit cards and $9,000 in credit card debt. I have reduced that to 1 credit card and $2,500 in 2 years.

So Im getting better with money and learning how to say "no" when people ask for it. No co-signing for me. No more people borrowing money from me.

Reply

Penny Stock Blog January 26, 2012 at 8:25 PM

I would totally completely agree it is never ever a good idea to cosign for somebody elses loan never.

Reply

Been there done that February 13, 2012 at 12:41 PM

It gets very tricky when dealing with a historically irresponsible parent who asks you to cosign for them. On one hand you feel as though you SHOULD do it for your mom (in my case) cause she did raise you. Even they feel you were born into this world to help them out…. but then you think, someone who you know doesn't pay their bills will not suddenly start to pay them just because you cosigned for them. I had very bad credit because I didn't understand credit yet and all the ways if would affect my life if it was bad and loaned my good name to my mom and all my siblings only to take a serious hit to my credit. I had to pay off all of the debt the incurred in my name. Some I even got judgements for. Now after thousands of dollars and years of paying my bills, I have good credit again and the worst offender has the audacity to ask me to cosign for them even though they have no job and no way to pay the bills once they come due. Well, I said no and guess what? They told me I was wrong for that!!!! The lunacity! This type of person can not and will not handle money or credit in a healthy way and no one should have to pay for it except them. Not everyone has bad credit because they didn't pay their bills. During my bad credit days, I had always paid my bills on time. My grandmother co-signed for my car and I never missed a payment! However, this is a rare circumstance so for me, I will never co-sign anything except for my child but I seriously doubt he'll need it as I will teach him what's right and good about money and credit

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femmefrugality March 14, 2012 at 12:46 AM

Ouch! The only time I’d cosign a loan is if it were my kid trying to build credit when they were first starting out. That’s messed up what they did to you, Tia. I’m very sorry.
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Aleksie April 29, 2012 at 2:01 AM

I'd argue that it is situational dependent and that not everyone has bad credit who needs a co-sign. College students do not necessarily have credit built for student loans. I was surprised when apartment searching this past March that I would need a co-signer for a lease on most apartments, a practice I learned is rather standard here in Boston if you are are student of any kind. FWIW, I have flawless rental history of almost 6 years, great credit, no debt, a part-time job, and a generous stipend, all that I was able to provide and STILL the landlords wanted a co-signer.

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Sal August 7, 2012 at 11:11 AM

Is it possible for the person I am cosigning for to take me off the loan? Let me know! Thanks,

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Shawanda Greene August 7, 2012 at 11:04 PM

More likely than not, it’s up to the lender to decide if they’ll release you from the obligation of repaying the loan. The person you’re cosigning for would either need to refinance the loan (without you listed as a cosigner), pay it off, or convince the lender they have the financial wherewithal to repay the loan without you.
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David Wright August 13, 2012 at 12:25 PM

Not all people are degenerates. My boss had his parents co sign to open the restaurant I work at. The restaurant is doing great and he’s already had them removed from the loan. If you believe in someone and are financially capable, co signing is not always a nightmare.

And right now I’m looking for someone to do the same for me. I know it won’t be easy, but hopefully someone will believe in me too. I’m not looking for a handout either, I have the down payment and everything, just not strong credit.

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