3 Reasons Why Cosigning a Loan is a Horrible Idea
A friend approaches you asking if you’ll cosign a loan for a car. What do you do? You want to help your friend out. After all, they are trustworthy. A simple signature will ensure that they will get the transportation they need.
Wrong. Bad idea. Don’t go there. Why? Here are three reasons you should never ever cosign a loan.
- Your credit score is put on the line (aka, now it is harder to get a noble mortgage). Let’s say your friend has you cosign for a car and moves to another state. You naturally drift apart and don’t communicate but once a month. That’s unfortunate. What’s more unfortunate is that your friend can’t make his car payment and doesn’t notify you (due to embarrassment) that he hasn’t paid in a year. Oh no. Now your credit score is affected at the same time you get a letter in the mail stating that your friend has been negligent. Not fun at all.
- You better expect to pay off the loan. Yep, that’s right. The bank has it down to a science. Crunching their numbers, the bank determined from the beginning that your friend would most likely default on their loan. That’s why they required a cosigner to get into the mess. Now, you get to pay off your friend’s car. Wow, it’s just getting better by the minute!
- You will close the deal on your friendship. Can you feel that anger starting to build up inside of you? I thought you would. Because you now have to pay for your friend’s car, you decide to call him up and complain. Your friend gets defensive. The tension between you and your friend is now at a breaking point. Your friend is so embarrassed that he decides to cut off all communication with you.
Get the picture? Never co-sign a loan. It’s a bad deal at every level. Your thoughts?
Those stages you are talking are exactly why I will never cosign on anything. I value my friendships way too much to put them in jeopardy by cosigning.
However, that made me think of another situation: What about friends partnering in business? What’s your take on that?
Thanks for reading JC! That’s awesome you never cosign.
Partnering in business is a great way to end a friendship in a hurry. What I recommend is that one person become the owner and the other an employee. That way, if your friend’s business fails, your reputation is not brought down in flames. You can always switch roles if the first business doesn’t work!
The other difficulty with partnering with your friend is that the role changes. Even becoming an employee or boss of your friend can be damaging. We live in two very distinct worlds: Social and Business. There is not one friend that can fit comfortably in both. It may work, and family businesses have prospered in the past, but they are generally bad ideas.