In the first article I wrote about cosigning, I provided many reasons why you shouldn’t cosign for anyone. There are too many negative factors that can impact your finances, your credit, and your relationships. However, there are still some people out there who feels that they won’t get burned if they cosign. Maybe you are a parent, wanting to help out your child. Or perhaps you want to perform a kind deed for a friend. Whatever the situation, there are five questions you must consider before cosigning.
Five Questions To Consider
- Does the loan justify the need? Does the person need a car loan because his car broke down or is it because he’s tired of his ride and wants “the latest and the greatest”?
- How is the person’s previous payment history? Does he consistently pay his bills on time? Is he known for borrowing money from people, but never pay them back?
- Does the person you are cosigning for have any contingency plans to pay for the loan? Does the person have a saving account? Is he known to save his money for a rainy day? If he loses his job tomorrow, does he still have the ability to pay his bills?
- Is the person you are cosigning for willing to make a commitment to pay the loan off and to have their agreement put in writing? Having an agreement in writing will protect you just in case you have to take the person to court. If he isn’t willing to accept full responsibility for the loan, this is a significant indication of how to proceed.
- Am I financially capable of taking care of the payment if the person doesn’t keep up with the payments? If the individual fails to pay the loan, it can affect your credit score. At least for a time, it is best to continue to pay the monthly note. If you are not willing or not able to pay for “someone else’s” loan, it is best that you do not cosign.
Making emotional or irrational decisions always lead to disaster. By considering these five questions, it takes the emotions out of the decision and forces you to consider the facts. If you answer these questions in the affirmative, it is safe to make an exception to cosign for your family or friend. On the other hand, if you answer any one of the questions negatively, it is in your best interest NOT to cosign for them.
Alternatives to Cosigning a Loan
Just because you said no to your friend or family member doesn’t mean that you cannot assist them. There are other options you can explore to help.
- Assist them with the down payment. If the person is in need for a new car after his old car went kaput, go with him and negotiate with the dealer to accept a greater downpayment instead of requiring a cosigner. Any dealer will tell you that 1). They will do anything to sell a car AND 2). They will do anything NOT to let money to walk away. This is a better way because all parties win. And trust me, it’s worth giving someone money for a downpayment than having the hassle that comes with cosigning.
- Educate them about other options. If your son or daughter needed a credit card to build credit but was declined, inform them about secured credit cards, explaining the benefits of them. If a friend wants to buy a home and need a cosigner, tell them about FHA, HUD, or their local Neighborhood Stabilization Programs (NSP) that accept a lower credit score and provide other financial assistance.
- Sometimes, a heart to heart is needed. Use this option at your discretion; do not use this option if the person may take offense. However, if you have a close relationship with this person, perhaps talk to them about the importance of getting their finances in order. Don’t just talk to them, but show them how to make a budget. Show them how to save money. Show them how to check their credit report or score. Having meaningful conversations show to them that you care about their long-term success.
We live in a society where the word “No” is a bad thing to say. I don’t feel that way. Saying no sometimes is the loving thing to do. It can promote peace and help cultivate a healthy friendship with those we love. Saying no to cosigning is no different. Sure, there are exceptions. Still, when we take the emotions out and consider the facts, we can accurately assess if cosigning is beneficial for everyone involved. Trust me, they may not like the reasons why you said no, but I guarantee that they will respect you for it. Who knows, they may learn from it and strive to improve their financial situation. Let me hear your thoughts on this subject.