Is Co-Signing a Loan a Wise Move? What About a Biblical Move?

Does Your Advisor Have a Record and You Don't Know It?Is Co-Signing a Loan a Wise Move? What About a Biblical Move?

It appears that there is a lot of co-signing going on as the debt bubble in this country expands. A creditcards.com survey recently stated these statistics:

  • ½ of those surveyed have helped someone obtain a car loan
  • Nineteen percent had co-signed on a student loan and 16 percent, a credit card
  • Among the co-signers in the survey, nearly 40 percent found themselves on the hook for at least part of the bill the primary borrower didn’t pay, while 28 percent saw a drop in their credit score from that borrower’s bad credit habits.

The auto loans statistic is especially disturbing considering that car loans now have topped 1 trillion dollars in this country. That is a concerning statistic. When you see categories of debt reach these levels you typically start to see problems.

So, what is wrong with helping someone out?

In Proverbs 6., the Bible talks about putting up security for a neighbor. It says if you are in that situation get out as quickly as possible. So, does that mean you don’t help someone in need? This is a tough one because we want to help people and there is a tendency to go into these arrangement with eyes wide shut. If something goes wrong and that debt goes bad, you as the co-signer are on the hook because you “co-borrowed” with another person. Thus, the good intentions of a co-signer can turn negative and destroy a relationship.

Proverbs 6 directly and indirectly speaks to three potential dangers of co-signing a loan. First, you will unintentionally create debt if the friend defaults. Second, by signing you are as it says in Proverbs 6:3 “fallen into your neighbor’s hands.” Finally, if it doesn’t work out, that relationship is probably destroyed. So, consider the willingness to accept the following conditions if you feel led to co-sign for anther. IT will definitely alter your perspective.

So, if you are going to co-sign a loan, it is important to go into the agreement with the conditions that it is OK if one day you have to pay that money back for your friend and at the same time be ok with never being paid back. It is also important that you actually have the cash available to pay back the loan in the event that loan goes bad.  You don’t want to create debt for yourself.  You have to be OK with the potential that this agreement might damage your credit.  Finally, you have to agree to never let the debt get in the way of your friendship no matter what happens.

Co-signing looks a little different given those conditions. That would require a special relationship and special set of circumstances. Always remember that co-signing is a high risk decision.  After all, there is a reason you are co-signing in the first place. They can’t get a loan any other way.

Bob Brooks is host of The Prudent Money Radio Show, Financial Advisor, and active money manager that consults and helps people plan.

 

 

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