$chool of Money Management, A Lesson in Co-signing

The following stories are shared to help people see and perhaps relate to different financial situations. Our characters are purely fictional (although perhaps only in name) and the stories are made-up (um, is anything really new under the sun?). Oh well, take a peek into Fred and Fiona’s lives. Hope you can take away with you some helpful back door advice. Take it away Fred and Fiona.

So here’s the scenario. One of thousands I might add. Fred and Fiona are “committed” to each other and stars are definitely blocking the view to reality. Read on. Fred has no money at the moment and very bad credit. Fred convinces Fiona that a new car would be the answer to his life’s problems and not to worry, he can come up with the money for the payments. Fiona says thoughtlessly “Yes, dear, anything for my sweet bumpkin.”

Fred then convinces Fiona to co-sign for the loan and the deed is done. They live happily never after. You see on that trip to Florida that Fred took in the new car, he met another Miss Right with money and ditched his beloved Fiona. Fred now has a new car and no money nor incentive to pay up. Since the loan is in Fiona’s name, she now has these menacing calls from the loan guys and big black marks showing up on her credit report. The one person she trusted with all her heart is making no payments. Oh, yea.
Fiona, like many people, did not understand the serious implications of co-signing. It may be hard to turn down a request from a friend, child, or in-law that you really want to help. After all, it would be so easy to just put your signature on that paper. You’d be helping them get that loan to relieve their debt situation or purchase that desperately needed car. Oh, kudos in heaven. But far too often that simple signature becomes bitterly complicated. By co-signing you may also be hindering them from dealing with their root issues of spending more than they earn.

Remember, if a lender is asking you to co-sign, it is because the person you are co-signing for is a bad credit risk to start with. The lenders experience is that these people usually can’t make the payments.
In the banker’s eyes you're the borrower, not the person you're co-signing for. Here are some important facts about co-signing:
Over 75% of people who co-sign end up paying off the debt, interest, late fees, attorney fees and/or collection fees. You’d be better off just giving them the money instead of co-signing for a loan.
Your credit can be damaged without you knowing it. If they miss a payment, as far as the lender is concerned, you are the one who has missed it. In some states lenders don’t have to let co-signers know when payments are missed.

If the person you co-signed for goes bankrupt, you still are legally required to pay. A scary note on co-signing for school loans. Don’t do it, don’t do it, don’t risk it! School loans are one of the few debts that even bankruptcy will not absolve.

If you co-sign a loan, this can negatively affect your own chances of getting a loan. It becomes part of the debt ratio that is used to figure your own eligibility.

The lender does not have to go after the person you co-signed for first if payments aren't made. You’re it.

IF they don’t pay and you don’t have the money to make payments several things can happen. Your wages could be garnished, legal action can be taken against you, or a lien could be put on your house or assets. (Most loan contracts state that if any payments are missed, the full amount is due immediately.)

If things go south, as Fred did, you not only lose your money and your good credit but jeopardize a friendship.

Throughout history, people have been warned of the dangers of co-signing. Around 1000 BC, King Solomon, one of the wisest persons to ever live wrote:
“My child, if you co-sign a loan for a friend or guarantee the debt of someone you hardly know—if you have trapped yourself by your agreement and are caught by what you said—quick, get out of it if you possibly can! You have placed yourself at your friend’s mercy. Now swallow your pride; go and beg to have your name erased. Don’t put it off. Do it now. Don’t rest until you do. Save yourself like a deer escaping from a hunter, like a bird fleeing from a net.”  The Bible: Proverbs 6:1-5 (NLT)