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If you have ever received a stack of paperwork from TAAG, you are familiar with the little red flag stickers we put next to the lines that require your signature.  Before we put those documents in front of you, we do our best to ensure that you are fully aware of what you are signing.  Unfortunately, there are many times you are asked to sign things for which the consequences aren’t as clear.  We see this often when folks are asked to co-sign for a loan.  There is something about the pre-fix “co” that seems to downplay the significance of the financial contract to which people are agreeing.  If you’re not careful, you might miss the red flags that are telling you “don’t sign here”.

A family member of mine did just that.  She was asked to co-sign for a student loan and at the time, she happily obliged because she wanted to help the person with his education.  That is a kind and generous gesture.  Unfortunately, she didn’t take the time to fully grasp what was being asked of her.  She didn’t realize that from then on, the lender would hold her equally responsible for the payments on the loan.  She was surprised to learn that the loan would show up on her credit report and that the actions the borrower took would affect her credit score.  If he defaulted, it would be up to her to either pay off the balance or risk being sued.  Because she didn’t know that, she didn’t evaluate it the same way she would have if she had been borrowing the money for herself.  She didn’t factor in how she would make the payments if the borrower didn’t make them, or consider that it might be harder for her to get a loan in the future because she already had this debt.  And in this case, the lender approved loans that were nearly equivalent to the entirety of her investment accounts.  Technically, she could cover them if she had to, but doing so would put her own financial well-being in jeopardy.

Of course none of this would happen if the borrower kept up with the payments, but the possibility alone caused her a fair amount of emotional turmoil.  She is the type of person for whom financial security has always been of paramount importance.  She has always paid her bills on time and never incurred a lot of debt.  Before she was retired, she was a true believer in the envelope system.  Now that she is retired, she has some of the same fears many retirees do about running out of money.  Co-signing these loans has amplified that anxiety.  She gets a billing statement every month just like the borrower.  If there is a problem with the account, she is notified.  All these things remind her of what would happen if the borrower doesn’t pay the loans.

I am certainly not suggesting that co-signing for a loan is never a good idea.  Co-signing a loan for someone might be giving them the ability to get a good education, buy their first car or rent their first apartment.  What I am saying is that as a potential co-signer, you should ask yourself “Is it financially and emotionally sound for me to take on this debt?”  Consider the possibility that for whatever reason, you might be on the hook for the liability.  Think about how taking on this debt could impact the relationship you have with the person for whom you are co-signing.  It could cause strain in your relationship, even more than it would have to decline co-signing in the first place.  Take the time to carefully learn what it is that you are agreeing to; every loan is different.  Your loan might enable the co-signer to be released after the borrower has established a good track record of timely payments.  You might be able to restrict your liability to the principal of the loan, preventing you from being responsible for late payments or fees.  One situation many people don’t consider is what happens when either the borrower or co-signer dies.  The impact could range from the debt being forgiven to the full balance of the debt being due immediately.

Most people’s willingness to co-sign a loan comes from a kind place.  They are thinking about the good they can do for someone and the rewarding feeling that it will give them.  But just like any other financial decision, we advise that you consider both the risk and reward before signing on the dotted line.  Even if the dotted line says “co” in front of it.