My hand slowly grazed the leather interior of the driver’s seat as I pictured myself cruising down the highway in my new ride. As soon as Dan, the car dealer, was finished with the credit check, I’d be able to pop the clutch from dream into reality.
Dan came back with a reluctant smile on his face. “Well, I have some bad news. Your loan was denied. The good news, however, is you just need a cosigner and the car is yours! Why don’t you call your parents and ask them to come in and sign?”
Didn’t sound like a big deal to me. With my dad on the other line, I explained my situation to him only to have my loan denied again. “I’m sorry son, I won’t cosign for you,” he told me.
Even though I was disappointed, I really couldn’t blame him. I was 19 years old and didn’t have the best credit. In fact, I had spent the past 3 months traveling with my band, so I didn’t even have a steady job. I was a prime candidate for defaulting on my payments.
Looking back, my dad taught me an extremely valuable lesson that day. Cosigning on a loan is never a good idea.
Why? Well I’m glad you asked.
There’s a Reason I Needed a Cosigner
Why is it that the bank wouldn’t give me the money for that purchase? Because they didn’t trust me to pay the money back.
Whether someone has a bad financial past, or no documented past at all, the bank doesn’t think they’re going to get their money. That’s why they require someone that has the financial stability to sign a paper stating, “if the primary borrower doesn’t pay, I will!”
That’s a pretty bold statement.
It’s like if your boss came up to you and asked if you had anyone you would recommend for a job opening at your company. Are you going to mention that friend who’s always late, has a negative attitude, and has been fired from his past 2 jobs?
No way! Even though you may like that person, their track record shows that they’re not the best employee. You wouldn’t want to risk your good name for them. It works the same way when cosigning a loan.
You’re on the Hook
As you’re signing your name on the dotted line, you become responsible for that debt. As I said before, if the primary borrower doesn’t pay, your credit and wallet will take a hit.
Let’s say you cosigned a loan for your niece because she really needed a car for college. After a few months of on-time payments, she loses her part time job and slowly falls behind. She consistently makes payments when she can, although they are sometimes up to 60 days late. Eventually, she stops making payments all together.
The thing is, you may not even realize that she hasn’t been up to date with the payments unless you check your credit score. Most cosigners don’t even realize there’s a problem until the collectors start calling.
And who are they going to call? (please don’t say the Ghostbusters).
That’s right. They’re not going to call that college student that wasn’t able to get the loan in the first place. Their first call will be to the name on the loan that they’re most likely to get a payment from; the cosigner.
Cosigning can Ruin Relationships
Let’s pretend my dad did volunteer to cosign that loan for me. After the paperwork was filed, I would have probably given him a huge hug and promised to make every payment on time.
The thing is, most people don’t default on a loan on purpose. We all intend on making the payments when we take out a loan. However, life happens.
A couple months after my dad cosigns, maybe another opportunity to go on tour with the band pops up. I drop everything and leave for 3 months. The tour doesn’t go as expected, and I end up losing a lot of money. Since there’s no income, there’s no way I can make my car payments.
I think you can see where this is going. My dad may be angry that I chose to leave when I have a financial responsibility that is now hurting him. I would definitely feel guilty for breaking my promise to him. Our relationship would be scarred.
Even though 19 year-old Craig may not have realized it, my dad saying no to cosigning a loan was one of the best things he could have done for me. I wasn’t ready for that purchase. The bank already tried to tell me that by denying my loan in the first place.
Are you thinking about doing someone a favor and cosigning their loan? Do them an even bigger favor by saying no.
Need more help? I'm a financial coach that is passionate about helping people on their journey to financial freedom. Drop me an email and I'd be happy to work with you one-on-one.
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