We’re nearing the end of the year and peak gift giving season. Sometimes, this can mean helping a family member or friend get that new car or home they want. But if their credit is less than stellar or they have been struggling financially, they may ask you to co-sign on the loan for them. Even if you trust this person and have faith that they’ll pay the loan back, co-signing is almost always a bad idea.
No One Can Predict the Future
No one can predict the future, and people act differently about money than almost anything else in their life. Even an otherwise good and responsible person can find themselves in default on a loan due to job loss, income reduction, divorce, health or other circumstances. That leaves you, the co-signer, holding the bag.
The Lender Will Have No Sympathy
Don’t think for a minute that the lender will have any sympathy for you. It won’t matter one bit that you didn’t benefit from the loan or receive any loan proceeds. The lender will look to recover 100% of the loan balance from you. That’s why co-signing on a loan is so dangerous.
The Person You Co-signed for May be Ungrateful
You may even find that the person you co-signed for isn’t helpful or sympathetic to you when things go south. All of a sudden, you’ll see an attitude change. It’s almost like they think it’s your problem not theirs. They may be so wrapped up in their own problems that they lose sight of what they’ve done to you by defaulting. Or they may see you as “wealthier” or “richer” and therefore able to handle it. This can be an incredibly frustrating experience for a co-signer.
So if at all possible, avoiding this situation is best. If a person can’t get a loan on their own, they probably shouldn’t get one. In fact, you may be making things worse by co-signing and helping them dig a hole.