Considering Co-signing a Loan?

Con

sidering Co-signing a Loan?

When co-signing a loan it means that you legally agree to share full responsibility for the debt - if the primary borrower fails to pay. Typically the cosigner has better credit than the primary borrower which provides the lender with the assurance that the loan will be repaid.

Loan types that allow co-signers are:

• Student Loans

• Auto Loans

• Personal Loans

• Mortgages

• Credit Card Agreements

The primary borrower can benefit by:

• An increased chance to get approved

• Potentially a lower interest rate and better terms

• The opportunity to build positive credit

The co-signer risks:

• Full financial responsibility if the primary borrower doesn’t pay

• Credit damage if the primary borrower missed or made any late payments

• Reduced borrowing power since the co-signed loan increases your debt to income ratio, which could make it harder for you to qualify for your own loan (example: a mortgage)

• Potential for legal action since lenders could sue you for repayment, which could lead to wage garnishment or property liens

• Strained relationship with the primary borrower

How to protect yourself as a co-signer?

• Review the loan documents and the official “Notice to Cosigner” before signing

• Consider having a written agreement in place with the primary borrower outlining payment expectations

• Monitor the account; request the lender send you monthly statements or notifications of missed payments

• Consider only co-signing if you can realistically afford to repay the entire loan if necessary

• Check if the lender offers a co-signer release option, allowing the primary borrower to take full responsibility of the loan after a certain number of on-time payments and meeting specific credit requirements.

Biblically we are warned against guaranteeing another person’s debt:

“He who puts up security for a stranger will surely suffer, but the one who hates indebtedness is secure.” - Proverbs 11:15

“A man lacking judgement strikes hands in pledge and puts up security for a neighbor.” - Proverbs 17:18

“Do not be one who gives pledges, who puts up security for debts; if you have nothing to pay, why should your bed be taken from under you.” - Proverbs 22:26-27

“My son, if you have put up security for your neighbor…free yourself…humble yourself and plead with your neighbor.” - Proverbs 6:1-5

“The wicked borrow and do not repay, but the righteous are gracious and giving.” - Psalm 37:21

“Be indebted to no one, except to one another in love. For he who loves his neighbor has fulfilled the law.” - Romans 13:8

Someone I knew used to say “Do good and forget.”

To me, that is a freeing statement.

It would remind me to not expect people to treat or do for me what I did or would do for them. It reminds me to be my best self. When you expect nothing in return there are no hard feelings.

So what might be a safer option than legally co-signing for another person’s debt:

• Gift the money, if you can afford to

• Help them with their budgeting

• Offer non-financial support, maybe helping them find a better job, a second job, help with childcare for some examples.