The Risks of Co-Signing for Others
One who has no sense shakes hands in pledge and puts up security for a neighbor.– Proverbs 17:18 NIV
Throughout my real estate career, I have come across many people who are ready to buy a home but can’t because of a past decision to co-sign for a grown child, cousin, boyfriend/girlfriend, etc. Regretfully, this made it difficult for them to obtain a mortgage loan. Co-signing a loan may at first appear to be a kind thing to do for a loved one who’s in need, but even the bible time after time refers to co-signing as foolish and unwise. It’s vital to recognize the risks and potential consequences that could significantly impact both your financial security and relationships.
It’s stupid to run up bills you’ll never be able to pay or to co-sign for the loan of your friend, Save yourself the trouble and don’t do either one-Proverbs 17:18 TPT
Positive intentions are frequently the driving force for co-signing. Helping out is something we naturally want to do, whether it's for our kids or immediate family members because we think we can give them a short-term, seemingly risk-free answer to their financial problems. But being cautious is essential, and you should fight the impulse to co-sign out of guilt or emotional pressure. It's important to understand that certain family members may be assessing your financial situation and believing, based just on their perceptions, that you have the resources to support them. It's critical to resist giving in to these presumptions. Stay firm and be empowered to say "No" when necessary.
It’s poor judgment to guarantee another person’s debt or put up security for a friend -Proverbs 17:18 NLT
The risks associated with co-signing may not be immediately apparent. By becoming a co-signer, you essentially guarantee someone else's debt. If they encounter financial challenges and fail to meet their obligations, you are legally responsible for the debt, including late fees and collection costs. Despite their good intentions, unforeseen circumstances like job loss or competing financial priorities can disrupt their ability to fulfill their commitment.
My son, if you have put up security for your neighbor if you have shaken hands in pledge for a stranger, you have been trapped by what you said, ensnared by the words of your mouth.– Proverbs 6:1-2 NIV
In addition to the financial consequences, co-signing can damage a relationship. Money matters are known to cause tension, and discussing money with family can breed mistrust and misconceptions. Should they have trouble repaying the debt, the stress that follows could strain your relationship, potentially causing irreparable damage.
The effect on your credit history is among the biggest risks. Any late payments or loan defaults will appear on your credit record, which could make it more difficult for you to get credit in the future. Even if the borrower is responsible, the mere act of being a co-signer can limit your borrowing capacity.
Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you. – Proverbs 22:26-27 NIV
Look into other options for assistance before committing to co-sign. Urge relatives to look into government assistance programs, work on improving their credit score, or attend financial counseling. Proposing alternative solutions allows you to support them without compromising your financial security.
Although it is admirable to want to assist people, co-signing carries significant risks that should not be taken lightly. It's crucial to weigh potential consequences and consider alternative forms of assistance that won't jeopardize your financial well-being and relationships. By maintaining a healthy boundary between financial matters and personal relationships, you can ensure a more secure and harmonious future for everyone involved.