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.
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.
Related Posts
Thanks for reading. You're welcome to leave your comments below. Remember to subscribe via RSS feed or e-mail to receive all the FREE updates!
{ 2 trackbacks }
{ 12 comments… read them below or add one }
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.
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.
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.
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.
Ouch! Atleast it was for her education. But I will no longer cosign, lend, or do business with family.
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
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?
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.
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.
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!
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.
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.
history essays | education essays