Common Cents - Co-Signing

 

Co-signing

 

In these difficult economic times, many of us have friends or relatives in need. We want to do whatever we can to help. The easy thing may be to just give them some money. A gift card to the grocery store or paying a utility bill can be a big relief for somebody who is strapped for cash. But Jesus said, “It is more blessed to give than receive.” That means the receiver may not be as excited about the gift as you are as the giver, so caution is advised.

Acts 4: 32-35 tells about the early church. The first Christians cared about one another and if someone had a need, somebody else might sell something to help them out. The Bible says the money was “laid at the Apostles feet,” implying some sort of discretionary benevolence fund that could be used by anyone in need. Many churches today have a similar system in place.

We might think that agreeing to a loan is a good idea, but banks are in the business of making loans and our friend may have already exhausted this possibility. If we decide to make a loan to a friend or relative, we are considering ourselves a small bank. We need to do the things a bank would do like  having a loan document spelling out the amount, interest, and repayment schedule as well as the consequences of a default. This is a business transaction, so be firm, but you also might want to consider this as a gift with some sort of debt forgiveness clause. For example, the loan agreement might say that the debt is cancelled if certain things happen, like they lose their job, finish a degree, or some incentive that would benefit everyone involved.

The worst thing we can do is co-sign a note. Ancient wisdom from the book of Proverbs compares co-signing a note to a bird caught in a snare. We should free ourselves and run as fast as we can. Forty percent of the people who co-sign for a friend end up costing themselves money and thirty percent find that the relationship is damaged by it.

A number of years ago, my dad co-signed an automobile loan for a relative. The relative defaulted on the loan and the car was repossessed. This showed up as a default and repossession on my dad’s credit because he co-signed the note. This made it more difficult for him to a get a home mortgage a few years later. If he had been a co-borrower and had his name on the title, instead of a co-signer, he could have claimed the car and sold it to pay off the loan and saved his credit rating.

The Credit Score that we each build based on our personal financial record makes a big difference on what percentage interest we are charged on a loan or if we are able to get a loan at all.  Allowing someone else’s actions to diminish a good record is painful, at best.

If we have friends or family in need, we must find a way to make an honorable difference that will not embarrass them. Give them a loan only if the money is not needed for our own financial demands. And never co-sign a loan.  That means never; there is no upside to co-signing. We can find ways to be generous and even irrationally generous by finding creative and substantial ways to encourage, support and lift up our friends or relatives, while protecting our relationships and our own financial future in these unusual times.