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The Simple Dollar

Cosigning a loan: Why you should never, ever do it

Cosigning a loan can seem like a great way to help someone out. But if your friend or family member's credit isn't good enough for a bank, it isn't good enough for you.

By Guest blogger / June 3, 2013

A sale pending sign sits in the front yard of a home in Mt. Lebanon, Pa. earlier this year. According to Hamm, cosigning a loan, for a home or other large purchase, is a bad idea.

Gene J. Puskar/AP/File

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I get this type of question all the time. A family member or a friend is trying to get a loan for some reason. Those evil banks won’t lend them any money. They want you to cosign their loan for them. It won’t cost you anything (so they say) and it’ll help a friend out!

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Let’s reword that question into the reality of the matter.

Are you willing to take on this debt and get nothing out of it other than just maintaining your credit? In other words, do you want the pain of debt without getting anything at all out of it?

“Oh, but that’s the downside of doing this!” you say. Well, what’s the upside? In the best case scenario, you’re roughly where you were to begin with.

“But I’ll have a better relationship with this person!” you say. A good friendship will survive whether or not you cosign on that loan. Furthermore, what kind of friend wants you to extend financial risk to them with basically nothing in return?

“The odds of the downside are pretty slim!” The bank doesn’t agree with you on that – if they did agree, they would offer the loan to this person. The bank has access to their credit report and is basing the decision on their actual history of paying back debt and they won’t lend because the odds of the downside look pretty significant to them.

If you cosign on that loan, you’re not going to get much out of it, no matter what. Your friend or family member is going to get the benefit of the loan. If they choose to stop paying the loan because the business doesn’t work out, that loan is around your neck. If they can’t repay that loan because of an unforeseen accident or something else, that loan is around your neck.

Don’t do it. Don’t cosign a loan no matter how much they plead. It is a huge financial risk for you and you won’t gain much out of it other than perhaps a very short term boost in a friendship.

I will never cosign a loan for any friend or any family member, with one exception. I am willing to cosign a student loan for my child.

What’s the difference in that case? My child’s student loan is the one situation I can think of where, if things go wrong, I’m willing to accept that weight hanging around my neck. A student loan, in the right circumstances, can lead my child to a path of financial and professional independence and I’m willing to take on the risk for that.

Don’t get me wrong, there’s real risk in that situation. If my child tries to default or something else goes wrong, it becomes my headache. For me, though, it’s the only situation where there is actually enough benefit – the potential for a child to become educated and independent – for me to at least consider the drawback to be worth it.

I accept that, in this situation, I very well might end up covering that debt. It’s a huge risk, but it has such potential upside in my life – having a successful and independent child – that I’m willing to take it.

Outside of that, I am never cosigning any kind of loan for any friend or any family member. I just won’t do it.

If their credit is not good enough for a bank to accept it, then it’s not good enough for me to accept it. I’m not willing to introduce something so risky into my life that a lending institution won’t touch it.

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