The act of co-signing a loan seems like a simple process. The person that needs you to co-sign is probably going to be very convincing when it comes to the prospects of paying the note back. On the surface, it will look like a no-risk deal. Further, you will feel good about helping someone out.
If that were the case, why would the Bible have this to say about co-signing?
He who puts up security for another will surely suffer, but whoever refuses to strike hands in pledge is safe.
Do not be a man who strikes hands in pledge or puts up security for debts - if you lack the means to pay; your very bed will be snatched from under you.
The Bible warns about co-signing, saying it is not a good idea to “strike hands in pledge.” Why is it such a bad thing, especially since you are helping someone?
The Assumption of Debt – By co-signing for another person, you are stating contractually that you are responsible for the debt. You helped create the debt. Although it will not show up on your credit report, you are still 100% responsible for that debt. You could be 100% debt-free, and by co-signing, you have just assumed the debt created by your friend. If your friend doesn’t pay, you have to pay.
You put your relationship in jeopardy – Since it is estimated that roughly 50% of co-signed loans go wrong, there is a roughly 50% chance that your relationship with your friend is going to end badly. At the beginning of the loan, everyone has good intentions to pay it back. How will you feel if your friend lets you down, and then you are on the hook for the money? Does your credit get ruined? There is a reason you are being asked to co-sign. It means that your friend is too risky to get money by conventional means and has to borrow your good name and credit to get a loan.
You are not doing your friend any favors – Do you want to enable your friend to borrow money when he or she really might not have any business borrowing money in the first place? The worst-case scenario is that you could be helping to prolong a debt spiral that will eventually blow up (and, of course, take you along with it!)
What do you do if you are already in this position? Proverbs 6:1-5 instructs to do everything possible to get out of it. Do your best to get your name removed. If that is not possible, make sure you stay on top of the note and make sure you will be notified if a payment is late.
The irony is that you get no credit for anything positive that happens, and you get 100% credit for everything negative that could occur.