All right... perhaps I took a bit of license on Bill Shakespeare. But he has so many words allocated to him, and he uses them so well, I just thought he wouldn't mind if I just borrowed a few, albeit loosely. At one time or another, most of us are asked to co-sign a loan: by a child or other family member, a friend, or a business partner. It's quite a confliction of feelings: you don't want to say no and deny the person the ability to complete their purchase or deal, but you know that you're potentially on the hook for the payments if they don't pay on time. Do I or don't I?
I recently spoke with a person whose child had student loans of over $100,000. The child got a job right out of school, but not for the salary they had hoped for. After a while, the dreaded phone call came: "I need you to pay my loan payments- I don't have enough money to pay my rent and the loan payment, so you have to." You have to. When I dug a little deeper into why the parent had to, the reply from the child was (and I warn you, you need to be sitting down) "you encouraged me to go to college so you should be responsible for the payments." Now, I'll give you a few minutes to stop laughing, as on the surface it is ridiculously nuts. But here's the real crazy part: since the parent co-signed for the student loans, if the kid stops paying, the parents are fully responsible for the $100,000 plus debt. Yep... just when you thought it was safe to go back in the water, or in this case approach retirement, you find out you have another mortgage of sorts to pay. So much for retirement... so much for the dream of finally having your life to yourself.
The fact is, when you co-sign for a loan, although you did it with the best of intentions, you MUST understand it makes you fully responsible to re-pay every single cent of the loan if the primary borrower walks away. They could be traveling the country in that new car having the time of their life, and you're stuck making the payments. They could be living the life of Riley (I always wondered who Riley was, and what his life was like?) and you'll be paying the mortgage. Yes, if you co-sign, you are responsible whether you got the education, drive the car, or live in the condo. It's a sad state of affairs, but from my vast experience with conversations with co-signers, they didn't understand the ramifications and let their emotions get in the way of a sound business decision. However bad this sounds, it gets worse. The consequences and difficulties that arise from a business transaction like this can be deep and very serious. The worst case scenario, with many in between, is the splitting up of family members never to talk to each other again. When money is involved, a negative turn usually spells disaster for all involved. Guilt and blame get tossed around like paper in the wind, and the accusations fly. All this for someone to avoid keeping up with the responsibility they originally signed on for... but with an out: the co-signer.
Co-signing on a loan can fault you in a number of ways. While you see yourself as just a safety net, all who view your credit history take for granted and count this as a primary loan in your name, which may exclude you from getting a loan for yourself, like a car, mortgage or other type of loan. Your lack of knowledge if the primary payer is paying on time may and will affect your credit rating, past the time for you to fix it. Now your own loan may be declined, or at least cost you more as you may have a default on your credit score. And just as you were trying to help with all good intentions, you now have a new monthly payment that may not fit into your budget, stretching your monthly expenses or causing you to dig into your savings, which took years and was so hard to build. And so, the saying goes..."no good deed goes unpunished." Think long and hard before you decide to co-sign for anyone- it could be a life changer... and not in a good way.
For more information on Neal's take on Life, Love and Money, just call the office to get his book, "Tales From the Chestnut Tree" at a discounted rate for all our readers. Just call the below number and we'll hook you up... happy reading!