A Friend or Loved One Calls
“My car just broke down and I was looking at this new car. I spoke to the car dealer and they told me they will not give me credit. I was wondering if you would cosign and help me with a down payment. I just need a little help right now. I will be getting a raise soon and then I can pay you back. You are my only hope. All you need to do is sign. It is the only way that I can get back and forth from work.”
Are we not here to take care of loved ones and help out family? Is it okay to cosign a loan for someone we trust?
Even the Bible has strong words to consider on this subject. “Only someone with no sense would promise to be responsible for someone else's debts.” (Proverbs 17:18 GNT). In other words, only a fool would cosign for another.
“My child, have you promised to be responsible for someone else's debts? Have you been caught by your own words, trapped by your own promises? Well then, my child, you are in that person's power, but this is how to get out of it: hurry to him, and beg him to release you. Don't let yourself go to sleep or even stop to rest. Get out of the trap like a bird or a deer escaping from a hunter. (Proverbs 6:1-5 GNT)
Most people need someone to cosign because banks have realized that certain borrowers are not worth the risk. Yes, it is true that banks are in the business of making loans and if there is any way that they can make the loan, they will. From the bank’s perspective if a borrower has been struggling to make payments on their other loans it means they have a low Fair Isaac Corporation (FICO) score. A FICO score measures various factors to determine credit risk. The five areas are: payment history, current level of indebtedness, types of credit used and length of credit history, and new credit. (http://www.investopedia.com/terms/f/ficoscore.asp)
When a bank reviews the borrower’s FICO score as a means to make a decision on granting a loan, why would they say yes when a borrower is already struggling?
In 2002, the FTC stated that three out of four cosigners have been requested to make loan payments. What happens if the cosigner does not pay? When a cosigner does not make good on a loan they cosigned for it is the same as if it was their own personal loan. When payments are not made lenders can and will resort to legal methods to ensure that they are being repaid. This can include harassing phone calls, garnishing wages and/or negative credit reporting against both the borrower and the cosigner.
Even though it may be momentarily uncomfortable, sometimes the best gift that one can give is a “no.”