Dear 3Rivers: Should I Co-Sign My Friend’s Loan?
Dear 3Rivers,
My friend and I have been best friends for over ten years. She recently fell on hard times and wants to go to school to get things back on track. She needs to take out student loans, but due to bad credit history, she needs a co-signer, so she’s asked me to help. I really want to help her out, and even though she’s confident she can, I’m not positive she’ll be able to pay her loan back on time or in full when the time comes, and that scares me. What risks would I have on my end by signing? Does she have any other options? I don’t want to hurt her feelings by saying “no”- implying that I don’t trust her - and risk our friendship. Please help.
Sincerely,
Hesitant Best Friend
Dear Hesitant,
Mingling money with friends and family is always a tough call. On one hand, you want nothing more than to help them out, but on the other, finances are always sensitive subject. When it comes to cosigning, it’s a legitimate fear that you might end up being left for broke because of someone else’s inability to pay, and ruin your relationship as a result.
THE CONS:
- It’s important to remember that by acting as a cosigner, you’re not simply serving as a reference for that friend or family member, you’re signing up to cover any missed payments and, should your friend default on the loan, pay it in its entirety. This could potentially wipe out your savings and wreck your credit score.
- In addition, if he or she is late on any payments, that might impact your credit score, too. This debt becomes your own and you’re responsible for it and the actions associated with it.
- By cosigning a loan, a car loan or a home loan for example, you do not gain any right or ownership to the car or home. You’re simply responsible for payments should the person you cosigned for be unable to make them.
- If neither of you are able to repay the debt, then the lender can repossess your belongings – like your car or home – to cover the debt. The person you cosign for might be able to declare bankruptcy, which will discharge the loan on their end, but you, as the cosigner, will not be protected.
- You might also find it more difficult to take out loans for yourself if you’ve cosigned a loan for someone else, since lenders look at your total outstanding debts, and that one will be attached to your report.
THE PROS:
- Your friend will be able to take out a loan and possibly be eligible for an even larger loan amount based on your history.
- You’ll feel good about being a financial supporter for your friend.
There are a few steps your friend can take before falling back entirely on a cosigner:
- She can investigate all of her government loan and program options – which might be less likely to require a cosigner.
- Once she’s exhausted those options, she can look into private loans. While most of these require a cosigner, a few may not, or may have loopholes.
- She can also use collateral – like her car, if she owns one. This means that she’s putting her car up for grabs should she not be able to make payments.
- She can also work on strengthening her credit – although this is not immediate and will take some time to do.
If you don’t feel 100% comfortable signing your name to your friend’s loan – tell her the truth. Let her know the risks that are involved and that you’re just not feeling financially stable enough yourself in order to help out. Offer up alternative ways of helping her get back on track – like vowing to stop buying her gifts for holidays while she’s in school and instead give her money that she could use toward a loan payment, or offer to help her find a part-time job, babysit her kids or pets if she needs a study night, or act as her sidekick when she goes to talk to the financial aid office. Showing her that you’ve still got her back, even if it’s in a different way than being her cosigner, will prove your loyalty and support as her best friend. If you’re truly two peas in a pod, she’ll understand, with no hard feelings.
Going for it? If you feel financially stable and confident enough to decide to cosign, be sure to thoroughly read through the terms of the loan, discuss every aspect with your friend, and investigate whether or not you might be able to act as a temporary cosigner – having your name removed from the loan once your friend is in better standing and no longer in need of your signature.
Sincerely,
3Rivers