Don’t Cosign Anything!
If you’re open to the idea of cosigning a loan or credit card for somebody, I don’t want to tell you that in all cases it is a bad idea but I will say that I’ve always had a hard time finding a good reason to say yes to a family member who needs a cosigner. I will also admit that when it comes to money I’m the family bad guy but it’s something I’ve had to get over.
Here’s my opinion: We need to make the world far more scared of cosigning. Kind of like we scared people in to kicking the smoking habit and now we’re scaring people in to eating less junk food, we need to do the same with cosigning because from a financial perspective it’s no different than the health version overeating. It may never cause you problems but if it does, it’s going to be one heck of a problem.
Don’t believe me? I have some reasons why I’m so against cosigning.
It’s Your Debt
The credit industry has done a great job of convincing cosigners that it’s a formality. Nothing will ever go wrong and you’ll never be on the hook. If that were the case, why do they require your involvement? Because the person you’re cosigning for is too much of a credit risk. The bank doesn’t want to pay the price if that person doesn’t pay. That’s your job.
Understand this. If they don’t pay, you’re on the hook for every penny of the debt. There’s no negotiating, no saying you don’t have the money and the bank will have no problem taking food out of your family’s hands to get their money for the debt that wasn’t yours to begin with. Still sound like a good idea? That’s the hard truth that the bank won’t tell you.
Your Credit Report is Blind
Let’s say that you cosigned for a $20,000 loan so a family member could get a car. Even though the loan isn’t technically yours, you have now added $20,000 to your debt load as far as your credit report is concerned. There is no distinction made concerning types of debt when it comes to your debt load.
Their Late Payments are Yours Too
Remember when we said that it’s your loan? Any payment that is not made on time may also tarnish your credit. We are now living in a world where even one missed payment can result in not being able to get a loan in the future.
I understand that you want to cosign in order to do something nice for somebody you care about. It’s admirable but it’s not a sound financial move.
Think of it this way. You’re doing something nice for that person but what if you have to take over payments and it negatively affects your family’s finances? Do you want to do something nice for one person at the expense of others you care about?
What do you think? Am I out of line? Let me know.