People Who Co-Sign Loans Aren’t Smart.

November 28, 2007 By Matthew Paulson

You’ll never believe it, but the bank actually knows you better than you know yourself. You want to borrow money for a car, a home, or some other purchase, and the bank knows you don’t have the ability to pay it back. You think you can afford it and are sure that if the bank just gave you the loan, you would have no problem paying it back! The problem is that banks pay millions of dollars a year to mathematicians called actuaries and know statistically based on your income, lifestyle, and credit-score, that you won’t be able to pay the loan back. At this point, they’ll ask you to find someone to co-sign the loan before they give it to you. If you actually find someone to co-sign for you, that person isn’t nearly as smart as you thought they were.

The problem with co-signing other people’s loans is that there are just no up-sides. You are taking 100% of the liability and none of the benefit. Your friend gets a new car and you get chased after by debt collectors if he or she does not pay off his loan. What kind of deal is that?

Most people end up co-signing loans because they believe they are helping out a friend or family member in need. In almost all cases, you aren’t helping the person who thinks he or she needs a loan. Carefully consider the reasons why the bank asked for a co-signer. Does the person who wants you to co-sign for the loan make enough money to pay it off? Have they had a history of not repaying their bills? There are all sorts of reasons the bank might want a co-signer, and almost all of them would indicate that you should definitely not “help” this person out. The only “help” that you would be giving them is enabling them to get into a huge amount of debt with a payment they likely wouldn’t be able to pay. That’s not “helping” anybody.

If someone asks you to co-sign a loan, be polite about it, but just say no. If they ask you why, just say that you don’t co-sign loans and leave it at that. If they make a big deal about it, that’s their problem. Don’t get suckered into co-signing the loan if you think your friend will get mad at you if you don’t. If this is the case, you likely don’t have much of a relationship to begin with.

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