When someone asks you to cosign on a loan the answer should always be no. Learn what you can do instead when someone asks for help.

First, Do No Harm

One of the things that will inevitably happen when you get your life in order is that people around you will notice. And, at some point, they may ask you for help. If you have a charitable personality, I fully encourage helping those around you.

But, be super careful that your help doesn’t bring harm. The wrong kind of help can actually hurt the people you are trying to help. And, it can put you at risk as well.

One kind of help that always hurts is cosigning for a loan.

Never cosign for a loan. You will hurt whoever you are trying to help. And, you put your own wellbeing at risk.



Cosign: Defined

When you ask a bank for a loan, they really want to give it to you.

Loans are how banks make money. That’s why, if they can find a way to justify giving you a loan with a reasonable expectation that you will pay them back, they will.

They review your income and other debts and make sure that if you add the new debt, you will still be able to make all of your payments. And, they review your recent payment history and make sure that you pay your bills on time.

If it turns out that you don’t make enough income or that your recent payment history isn’t strong enough, they will decline your loan application.

But, what if you added a bunch of income and a great history of paying bills to your application? Then the bank would surely say yes!

Enter the cosigner.

A cosigner is someone who gets added to a loan application so that the income or the payment history on the application improves enough for the bank to justify the loan.

Sounds innocent enough, right? Sure, you can use my income and credit score to qualify for a loan. What could it hurt?



Cosign: Re-defined

When you cosign for a loan it is more than just allowing the bank to use your income and payment history to qualify for the loan. You are personally guaranteeing the payments. In fact, nearly 40% of people who cosign end up having to make payments themselves.

Let’s look at it another way. Let’s say your friend wants a $20,000 loan to buy a car. But, the bank says no. So, your friend asks you to cosign. If you say yes, you are personally guaranteeing that you will make the payments if your friend doesn’t.

Would you borrow $20,000 and give the cash to your friend? What if your friend promised to pay you back?

But wait, there’s more!

When you cosign for your friend, they are actually not even promising to pay you back. If they stop paying, the bank will come after you. Then, if you are forced to pay any of the loan off, your friend has absolutely no legal obligation to pay you back! None!

Let’s look at the incentives here. Your friend already has bad credit (otherwise they would have gotten approved for the loan). If they fall behind on the loan, their credit won’t tank, because it’s already bad. But, you have good credit (otherwise you wouldn’t be much help as a cosigner). If your friend falls behind and you don’t step in, your credit will tank. And, that could cost you real money! Plus, the bank can sue you to recover their loan. And, you will lose! Then, they can garnish your wages if you refuse to pay.

How strong is your friendship with this person? Is it strong enough to be the only incentive they have to stay current on this loan?


Cosign Indignity

Cosigning does more harm than just putting your financial wellbeing at risk. It actually harms the person you’re trying to help.

There is dignity in independence. Standing on your own two feet and solving your own problems is a skill. Building that skill takes practice. And, if someone else is always bailing you out of the messes you create, then you will never learn that skill.

As I’ve written before, debt does not allow you to buy things you couldn’t otherwise afford. It simply lets you buy things now that you wouldn’t be able to afford until later. Debt does that for you in exchange for interest and added risk.

So, your friend wants to buy something that they cannot afford right now. The bank reviewed their financial situation and said: “you cannot afford this right now.” If you cosign for your friend, you are helping them buy something that they cannot afford right now. How are they ever going to learn to be patient, do the work, save up, and buy things when they can afford it?

You are endorsing their irresponsible behavior.

Stop it.

If they want to buy that thing, then they need to make the sacrifices necessary to be able to afford it. They need to learn patience and resolve. Find extra income, cut expenses, clean up their credit report… these are all things that they can do to improve their situation. And, they will do none of them if you cosign.


Cosign Alternatives

So, how can you help people who really need it? Is there a way to provide assistance without doing harm?

Here are a few ways you can help those around you without doing harm.

Authorized user

This one is for the parents out there. When your kids turn 18, their credit history is blank. This makes it a bit more difficult for them to qualify for things that they actually can afford (sometimes).

Do not cosign for them.

Instead, if you have good credit, add them as an authorized user to one of your oldest credit card accounts. Most banks make this super easy and you can do it online. The bank will send you a new card with your kid’s name on it. Cut it up. Do not give your adult child access to your credit card. That’s the same as cosigning.

But, when you name your child as an authorized user, the full history of that card will be added to their credit report. I’ve seen kids go from no score, to a 700+ FICO with just this one move.

This gives your adult child a leg-up when they go to apply for a loan. But, that’s all it does.

Your child is still responsible for making good financial decisions and not getting over extended. And, you haven’t put your own finances at risk, because you didn’t give your child physical access to your account.

Money Coaching

It is almost always better to give people what they need, instead of what they asked for. If someone has asked you to cosign for them, what they really need is financial advice.

This is your chance to be their money coach.

Tell them your story. If you have done well enough to be a potential cosigner, then you have made reasonable financial decisions. So, tell them how you did it.

Don’t tell them what to do. Just tell them how you did it. Share your story. Inspire them with tales of how you went without, how you saved up for things, and how you sacrificed in the short term so you could achieve long-term goals.

Of course, if you’re not comfortable with that, you could always send them to me. I’d be happy to help! You could even pay for their Money Coaching sessions!

Cash

Sometimes, bad things happen to good people. If someone in your life is facing a hardship, be generous.

Don’t cosign for a loan. Don’t give them a loan. Just give them a gift.

Give them a one-time generous gift to help them out of a tough spot. There is absolutely nothing wrong with helping friends and family in a time of need. In fact, charity is probably the most noble use of money.

Sorry, No

“No” is a full sentence.

You should feel fully empowered to simply say no when anyone asks you to cosign.

“Sorry, no. I don’t cosign.”

You don’t need to explain. You don’t need to waffle. Just say no.

First, do no harm. By saying yes to cosigning, you are harming your friend. So, by saying no you are at least stopping the harm.

Saying no is the least you can do.


Final Thoughts

Banks love to lend money. In fact, I think they lend too much. I think their criteria are too loose. People can borrow themselves into financial ruin.

So, if a bank looks at your friend and says they’re too risky… then they’re too risky.

Cosigning is never good. There are no circumstances when cosigning for a friend or relative will help them. It puts your finances at risk and it encourages them to take on debt that they cannot afford.

Don’t harm your friend by helping them access money they cannot afford to pay back. That will harm your friend.

If you really want to help them, teach them how to be more responsible with money. Or, send them to me and I’ll do it. Or, if they really are in a tough spot, give them cash.

But, never, ever, cosign.

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