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.
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