I have come to the conclusion that cosigned loans are only advantageous to the lender, possibly advantageous to the borrower, and never advantageous to the cosigner. If a potential borrower does not have good enough credit, or enough savings, collateral, or income to take out a loan, then they should not be trying to get the loan in the first place.
The AARP has a list of 7 loans that should not be cosigned. These are
- Private student loans
- Business loans
- Car loans
- Construction loans
- Balloon loans
- Payday loans
MyFICO has a story of warning, titled, “Cosigning Student Loans – Learn From My Mistakes.” This was written by someone who cosigned on a $60k student loan with Sallie Mae. And of course, the person with the loan defaulted and left the cosigner holding the bag. They became the responsible party, and paid off the student loan. The author has 9 tips related to avoiding problems with loans.
- Do not cosign a student loan
- Loan only what you can lose
- Unpaid loans grow
- Sallie Mae does not care
- Don’t delay payments
- No legal recourse
- Would i do business with this person?
- Protect yourself
- People can be irresponsible
Suze Orman says, “Never cosign a loan. Once you have cosigned, you cannot get out of it–even on your deathbed.”
As the title of this article suggests, I have never, nor will I ever, cosign a loan. There are just too many possible problems for the cosigner. You could end up being on the hook for payment of the loan. Your credit score will be tied to this debt. Any late or missed payments will adversely affect your credit score. Bill collectors may come after you. And finally, other than guilt, you have no ability to make the person who took out the loan pay you back.
If my son were to come to me and ask me to cosign a loan for him, I would sit down with him and try to figure out why he needs the loan, and why does it require a cosigner. If it is that his credit score is bad, or non-existent, then he will need to wait on the loan and fix his credit score. If he were trying to get a student loan, I would tell him he will just have to find other financial means for college.
My wife and I have saved enough that our son should be able to get through his undergraduate studies at a state university with money left over. We have already told him how much we have saved, and how much we expect to have when he starts college, which will be approximately $250k. If he ends up needing more money than that, he will have to either get scholarships, work a part-time job, or some combination of the two.
Have you ever cosigned a loan?