Sunday, February 12, 2012

NEVER Co-sign a Loan! Part Deux

Never co-sign a loan.  No ifs, ands, or buts!

In a previous posting, I mentioned that you should NEVER, EVER Co-sign a loan.  Ever, ever, ever, ever, ever!  Ever!

In response to that posting, I got a few inquiries, "Well, yes, but what about..."  NO.  Which part of NEVER did you not get?

And people who ASK YOU to co-sign are not your friends, but are the lowest sort of scum of the earth who want to take THEIR financial troubles and make them YOURS.  And they will, too, as your credit rating is destroyed - even if they pay back the loan.  And guess what?  They won't pay back the loan.  The bank already decided that - which is why they denied the loan without a co-signer.

When someone asks you to co-sign a loan, or if they ask to "borrow" money, just find new friends.  Once you turn a friendship into a financial transaction, the friendship is ruined for good.  Even if they pay it back (they rarely do) the balance of power is shifted.  And they will ask you, again and again, to be a bank.  Just walk away, you don't need friends like that!

If you really want to give someone a new car or a house, that is your business.  But don't think by "co-signing" you are just loaning them your signature.  YOU ARE LIABLE FOR THE FULL LOAN AMOUNT AND WILL LIKELY HAVE TO PAY IT OFF.

And I am not alone on this - just google "Never Co-Sign a Loan" and see:

Why you should never co-sign a loan - MSN Money"You should never co-sign a loan," says Lynn Brenner, a personal finance columnist. If the primary borrower gets behind in payments, "the bank will come after ...

Why You Should Never, Ever Cosign a Loan for Anyone - Megan ... Spencer Kornhaber · More by Spencer KornhaberJun 1, 2011 – I mentioned in my last post that cosigning loans is risky. How risky? According to the FTC,…

4 Reasons You Should Never Cosign A Loan | You Have More Than ... 19, 2009 – Picture it. On a blistering cold evening in the winter of 2005, I received a frantic phone call from a family member whose loan application had ..

Living Stingy: NEVER co-sign a Loan! 6, 2011 – Never EVER co-sign a loan! It could bankrupt you! In my "Never Buy A Condo!" article, I noted that the title was a bit tongue-in-cheek, as there ...

Never Co-Sign A Car Loan For Anyone Gyutae Park · More by Gyutae Park This particular story was a man who called in to tell about how he helped a friend from church get a loan on a car by co-signing for the loan.  He never thought ...

The Simple Dollar » Never Cosign a Loan Unless You Want to Pay It ... 11, 2010 – NEVER EVER co-sign a loan. Don't do it out of love or money. There is a good reason why the bank won't give that person a loan without a ...

McArdle Warns, 'Never, Ever Cosign A Loan' : NPR › NewsOpinion Jun 7, 2011 – Deciding whether to co-sign on a loan is a complicated mix of emotion, personal relations and money. Megan McArdle, business and ...

Never co-sign a loan, especially for family members. 18, 2009 – Never co-sign a loan for someone, especially family. Taking out a loan for yourself is bad enough, but co-signing a loan is just plain stupid.

Should I Cosign For a Loan? - Faithful With A Few 25, 2010 – In fact, many people will actually cosign for loans even when they do not feel comfortable doing it. It is usually due to not wanting to be the bad 

Suze Orman's Top Five Money Mistakes You Can't Afford To Make ... days ago – “Never cosign a loan,” counsels Orman. “Once you have cosigned, you cannot get out of it–even on your deathbed.” Financially, there's nothing ...

Even the "Sooze" agrees with me on this one.... and she lists it as NUMBER ONE in her all-time TOP FIVE financial mistakes!  If you don't believe me, listen to the other folks above.

But why is asking someone to co-sign a loan so EVIL?  Because they don't really NEED the money (no, not really, ever, ever!) but are asking someone to risk ruining their credit rating and to eventually pay off their loan for them, so they can have a new car, or a house, or in one scenario provided by a reader, speculate in real estate.

The person asking you to co-sign is a greedy selfish person who wants it all now, even after they have already screwed up their finances.  And they have no compunction about taking you down with them.  A respectable person would not come to YOU with their financial problems, but instead man-up to their issues and figure it out on their own.

You are not their bank, their counselor, or savior.  But surprisingly, a lot of people like to "help others" and then nail themselves to the cross when it all goes horribly wrong.  They love the attention of being the "savior" of the person they are helping, and then being the "victim" later on.

And the "Well, but..." excuses go on and on, including an odious comment I got from one reader who said they had "a really good reason" why co-signing was a good idea, but "didn't have enough space here to explain why" - and then went on for five paragraphs flaming me.  The absence of real argument is the telling part.  They have no real excuse - or at least one that can't be pulled apart easily.  Here are some of the idiotic reasons I have heard people give to co-sign or to ask someone to co-sign.  All of them are pretty stupid:

  • But what if they are a "really nice person?" who would never default?  It doesn't matter.   People don't default on loans to be mean, they do it because they can't make the payments - and the bank has already determined this will happen.  They will likely default on the loan, be too ashamed to tell you, and by the time you find out, your credit is ruined, as are your finances.  And "nice people" don't ask friends to co-sign loans!
  • But what if they have a good credit report?   Then they don't need you to co-sign.  If they are asking you to co-sign, then they don't have good credit.
  • But what if it is for a really good reason?  What reason would be good to borrow money?  None.  You should only borrow money for major things in life - like buying a home.  But if you can't afford a home, RENT ONE.  There is no "right" to home ownership, particularly for insolvent people.
  • But what if they are "of good moral character?"  People with good moral character have good credit - and don't ask friends to co-sign loans.
  • But what if they are "really good friends?"  Really good friends don't ask people to co-sign loans.
  • But what if they are going through a bad time, financially?  Well, now YOU are going to be going through a really bad time financially.   Borrowing money isn't a way out of financial trouble, it is only pouring gasoline on the fire,
  • What if they need a "second chance" in life or need to "build up their credit rating" ?  You are just risking your own financial security so they can  have a Camaro.  Who is going to bail YOUR ass out?
  • What if they need a co-signer for a student loan? The only student loans that would need this are odious "private loans" that are usually touted by worthless "for profit" schools.  Walk away from these.  Federally guaranteed student loans do not require a co-signer.  Whenever you see this argument raised on the Internet, the person raising it is likely a shill for the lucrative for-profit college industry and/or private student loan companies.
  • But what if they need a car to get to work (usually at a new job)?  Well, buy them an old beater.  Or give them your car and buy a new one for yourself.  But don't just buy them a new car, because that is what co-signing is.  And why do these sorts of odious parasitic scumbags always "Need" a brand-new car?  Oh, yea, it has to be "reliable."  Right.  Gotcha.  Not!
  • I want to buy a house and I found a deal where I can buy a place, rent out part, make money and then flip it for a profit - but my credit is no good.  I need a co-signer.   Sorry, no sale again.  What you are proposing is a risk-taking financial venture - using someone else to take the risk at no cost to you but great risk to them.  Either go in as partners on the deal (titling the property jointly) and agreeing to a split of the proceeds (yes, providing your credit rating should be worth something!) or let them take the risks.  Otherwise you are a real selfish bastard.  Bear in mind that you are wiping out Granny's ability to borrow, as her debt/equity ratio will now be high.
  • We are starting out and want to buy a house, but don't have credit.  Again, where does this "We have to OWN a home" bullshit come from?  And if your credit sucks, whose fault is that?  Rent for a few years - everyone does it when they are young.  Well, everyone with honor and dignity. Cheesy people ask their parents or grandparents to co-sign for them, and then wipe them out financially as a "thank you" gift.
  • I want to sell our house to our son, but he doesn't qualify for a mortgage.  Well, hold the mortgage yourself, then, and have him pay you directly.  Your credit rating won't be destroyed, and you will get a steady source of income in retirement.  Or just keep the house and rent it to him.  Either way, you are guaranteed money, but don't have to worry about losing it all.  If you co-sign the mortgage for him, and he stops paying on the note, you all lose out.  And you can't even stop the bank from tossing him out on the street, unless you want to make a difficult mortgage payment.  If you are landlord or mortgage holder, you at least have the option of forgiving late payments for your child.  If you co-sign a mortgage and then invest the money (ouch!) you are letting the banks make huge profits at each end of the transaction and then losing all control of the situation, AND ruining your credit rating.  Sorry, no sale here, either!
  • My friend has medical bills from a long illness - I want to help her out.  Well, now they are YOUR medical bills, and now YOU have to pay them.  And now, likely, BOTH OF YOU will end up in Bankruptcy court, instead of just her.  She could have discharged most of those medical debts in bankruptcy and started over.  Now both of you will have to start over, and likely you will no longer be friends.  Friends don't ask friends to do shit like that - borrow money or co-sign, or whatever.
You get the idea.   No matter what "good reason" you come up with, there is always an alternative - usually a better alternative - that doesn't involve you co-signing loans.  If a person is facing bankruptcy, let them face it.  Help them out if you can, but signing your life away isn't going to make it better for either of you.

Giving a young kid a brand new car is just irresponsible and teaches them only that the best things in life are truly free when grandma pays for them.  When you die, they will end up bitterly disappointed people after they burn through your inheritance and ends up destitute, as they never learned fiscal responsibility.  And you were the enabler of the whole deal.

So you co-signed a loan already.  What can you do?  Nothing really.  You are proper fucked, utterly, royally, and completely.  You can stay up nights for the remainder of the loan period (for a mortgage, that means forever) and worry about it.  This will lower your life expectancy by five years, easily.  You can hope the person who asked you will pay back the note.  The Federal Trade Commission says this is very unlikely - there is a 75% chance you will be stuck paying off the note.

There is nothing, repeat nothing, you can do at this point other than to hope the person who took out the loan has the cash to pay it back and the willingness to do so.  You have placed your entire financial life, your financial future, your retirement security - everything you have in life - in the hands of someone who every bank in the country thinks is fiscally irresponsible.  Brilliant move!

Do you see NOW why this is such an utterly, totally, bad idea?  Why I say NEVER and mean it?

If it was for a car, you can't repossess the car.  All you can do is pay off the loan - or default yourself and end up in your own financial trouble.  You just bought you friend, grandchild, or child a car, even though you can't afford one yourself.   If all you got dinged for was a $20,000 car and a destroyed credit rating, well, you got off lucky.  Maybe you can find some chump to co-sign for you?  Ha-ha.

If it was for a house, you can't toss them out of the house or force them to sell it.  All you can do is pay off the loan - or default yourself and end up bankrupt.  And since a mortgage is for 30 years and the amounts due can be in the hundreds of thousands of dollars (and since houses can go upside-down) you are going to be utterly screwed, as the mortgage company comes after you with a $50,000 judgement and then puts a lien on your house.

You can declare bankruptcy, but even then, the loan amount may be "worked out" and not written off. You may still have to make payments, even post-bankruptcy, for five years or so.  And you may lose a lot of your assets in the interim.

Suicide or changing your identity are really the only ways out of this mess.  Both are illegal and not recommended.

Do you start to see why this is such a bad idea?  When killing yourself is the only option out of a financial difficulty, it tells you volumes.

You see, as co-signer, you guaranteed the note.  This means you said you would pay for it.  And if the person who asked you to co-sign takes the car and drives off to Tijuana, then you are stuck paying for it.

What happens if you don't make the payments?  Same thing as if you had taken out the loan yourself, except since you don't have the collateral (car, house) you can't sell it to pay back the loan - and you can't force the other person to sell it, either.

So, they get a judgement against you - and they will, as there is no legal defense you can use (ignorance is not a defense, although some lawyer will take your money, represent you in court, and you will lose anyway).  They can then attach a lien to YOUR house or YOUR car.  How much fun will that be?  Living in a homeless shelter and taking a bus to work, driving by your friend's house and seeing them wax the car you paid for?

You're just fucked, period.  It is too late to say, "I'll never do THAT again!"  It is too late to stop playing the Hillbilly fucking financing game.  Your best friend just took you out, financially, and there is nothing, repeat nothing, you can do about it.

And this happens all the time.   Listen....

Billy was a college dropout and worked odd jobs.  He finally got a "good" job making $25,000 a year in construction.  He spent most of this on rent, beer, and pot.  He drove an old economy car, but dreamed of having a shiny new Camaro. 
One day, driving by the dealer, he stopped to look at his dream car.  There was no way he could afford it - it would cost a year's salary!  And he had not held his job very long.  And since he had screwed up badly with credit cards in college (and was in default on his student loans), his credit rating was in the trash.  He was a horrible credit risk and a very irresponsible person. 
The salesman shows Billy how he can "afford" the car if he can get a co-signer on the note, as, after running Billy's credit, he realizes that even the "buy here, pay here" people won't touch him. 
Billy was disappointed.  But Billy wanted to get laid.   And the waitress at the bar he frequented would surely go "all the way" with him if he had a cool car.  But before he could screw the waitress, however, he would have to screw his grandmother
His grandmother lived in a double-wide outside of town.  It was paid for, and  she got by on her meager savings and her husband's social security.  He had died years earlier of a lung ailment, probably related to all the junk he inhaled when he worked at the steel mill. 
She also had the tattered remnants of the pension plan her husband was supposed to get, but thanks to Bain Capital, was only 40 cents on the dollar.  And yea, she and her husband both voted Republican.  Thank God that Billy won't get Gay-Married!   Grandma isn't all that bright, I'm afraid.  Although she is a sweet lady. 
Billy goes out to Grandma's house to pitch co-signing the loan.  He visited Grandma frequently, and she liked the company of this handsome young man. The fact that he usually had some pitch for money when he came didn't disturb her too much.  But the check register of her checkbook contained a lot of entries to Billy for various amounts from $25 to $1000, every month, like clockwork, as Billy's sister would discover, to her horror, several years later, after Grandma died destitute. 
And let me just interject here that Billy is indeed a real person.  I knew this guy - and plenty like him (or her).  He is a low-life.  Scamming your Grandma or asking your parents for financial help, is sort of odious.  Doing it for wants and not needs is worse.  Doing it well into your 40's and 50's is just embarrassing.  But a lot of people do it.  Ick people, I call them.  They are so.... icky.
So, Billy arrives at the trailer and pitches the loan papers to Grandma.  She isn't loaning him money, just putting her name down, sort of like a character reference, he explains.  Grandma, already getting senile, goes along with the deal.  Billy also got Grandma to write a check for the down payment as well - with a little left over to buy weed!  Sweet! 
The arguments used by Billy are the usual ones.  "But, Grandma, I need a reliable car to get to work!"  Grandma is happy Billy is finally working, as he was a "troubled child" - actually just trouble.  And Grandma knows what it is like to have an unreliable car.  After all, when she and her husband got married, all they could afford were old jalopies that constantly broke down. 
Grandma fails to make the connection, though, that she and her husband did just fine, nevertheless, and didn't buy a brand-new car in their entire lifetime.  They struggled and saved and scrimped and worked hard.   And here she was handing a brand new car to a 22-year-old. 
Billy gets the car.  He might even get laid.  Who knows?  Who cares?  But the cost of insurance is staggering for a young kid with a new car - thousands of dollars a year.  And even though Grandma co-signed the loan, Billy has to make the payments - which are $400 a month. 
Billy gets a few tickets showing off.  He is young and immature, and there is a reason young kids should not have new cars.  He has a small accident and dents a fender, but is afraid to report it to the insurance company - his rates are staggering and he already is about to lose his license. 
Billy's bills are piling up. He is living the high life, drinking every night, smoking pot, trying to pick up girls.  Then he gets laid off from his job.  He showed up late and hung over - if he showed up at all.  Hey, he had a new Camaro, he didn't need those fools! 
But now he was broke, and the loan payments couldn't be made.  Pretty soon, debt collectors were calling his bewildered grandmother and demanding payment on the loan.  Billy didn't answer Grandma's calls. 
Grandma, barely getting by as it was, now finds herself strapped an additional $400 a month for another 48 months.  Billy has a sweet ride!  Grandma is eating cat food.

A far-fetched scenario?  No.  Three out of Four people who ask someone to co-sign end up defaulting on the loan.  You should make plans on how to make the payments before you co-sign, period.

But wait, it gets worse.  After Grandma eats Raman noodles for four years to pay for Billy's Camaro, Billy finally comes into some money - he gets a good job or inherits from his parents.  Will he pay back Grandma for the Camaro?

HELL NO, and she can't make him, either.  You see, co-signing the note is not a contract between Grandma and Billy, but Grandma and the finance company.  She has no right to go after Billy or his car. And even if Billy won the lottery, she couldn't get paid back.  And no, the Billys of the world rarely feel morally obligated to do so.  In fact, they never do.

People like Billy are evil, plain and simple.  And in addition to being a selfish low-life, he also is the worst sort of white-trash there is.  And co-signing is right up there with PayDay loans, pawn shops, and other trailer-trash Hillbilly financing schemes.

Co-signing is what poor people do, which is why they are poor.  If you want to stop being poor, stop doing poor things - and making poor choices.  Co-signing is a one-way trip to poverty.!

And yet, some folks would say Grandma was being "selfish" if she refused to sign the note!  Some folks are truly evil!  Taking care of yourself is your first obligation.  NOT creating more "needy people" is the most important thing you can do.  Before you go out and try to save the world, save yourself.

And the worst sort of people on the earth are those who claim to be pious by "helping others" while placing themselves in perpetual peril.  Giving brand-new cars to your kids while bankrupting your own estate is not helping anyone.  It is just being idiotic.  And being around people like that is just depressing, as they moan on and on about how rotten life is, and how put-upon they are.  And yet, life is sweet and their problems are self-inflicted. 

And all it does to the person who gets the free car is teach them to be dependent - that if you want to borrow money, ask Grandma.  They never learn to live their own lives.  They are, well, icky! 

The reality is, there is NEVER, EVER a situation where co-signing makes any "sense" at all.   Get OUT of the mindset that borrowing money is a privilege - it ain't.  You have to pay it back.  And if you get a co-signer, they have to pay it back.

If your child gets into financial trouble, co-signing a loan for a new car is just rewarding them.  And it won't "repair" their credit rating.

Co-signing a loan won't "build up" a child's credit rating.

If your neighbor is broke and can't afford to live in their home, co-signing the note isn't going to "keep them in the home"  -  unless you want to make their mortgage payments for them.

We all face tough choices in life.  And sometimes, the best thing is to do without.  A child will be OK if they have to drive a used car, trust me.  They do not NEED a brand-new one.  In fact, it is a horrible proposition, just because of the insurance.

And co-signing a mortgage is just financial suicide.  If the person defaults, it could take out your whole financial estate.  Who will then bail YOU out?  Not the person who asked you to co-sign, that's for sure!

If you want to buy someone a house, at least make sure your name is on the DEED, so you can force them to sell the place, if they stop making the payments.  But few co-signers think to do that.

There is NO, repeat NO situation where a person's life can be improved by BORROWING money.  If someone comes to you and says they are desperate to borrow money, what they really need to do is learn to live on less.  Borrowing more - on your credit rating and your signature - is not going to make things better for them.

But it will surely make things worse for you!

UPDATE:  12/22/2012:   People have asked me, "well, what about STUDENT LOANS?"

Well, what about them?  Federally guaranteed Student Loans do not require a co-signer.

PRIVATE loans, which are TOXIC do.  Just don't take them out!

Who will pressure you to take out a Private Student Loan?  An odious "for-profit" college that will give your kid a worthless degree that will never qualify them for any job that will even remotely help them pay off a loan.

And even if your son or daughter DIES, you will still have to pay off the loan, like this poor immigrant found out the hard way.

Co-signing is a rip-off, no matter how you slice it.  When some agency suggests that you co-sign a loan, whether it is a consumer lending agency, a car dealer, or a for-profit school, RUN AWAY as quickly as possible.