The cosigner gets all of the responsibility for a loan without any of the fun of driving the new car.
Most of you are already arguing with me. Someone cosigned for you and you repaid that debt, so you see no problem helping someone else in the future. Just because your situation had a positive ending does not mean that future cosign arrangements will work out. In fact, according to Creditcards.com, 40% of cosigners end up regretting the decision to sign on the dotted line.
Well, when you cosign for your friend’s new car, you’re not vouching for their good name or character. You are agreeing to pay the bill if the primary borrower stops paying. You are responsible for all of the fees and interest, including collection costs, if there are any. If the car is repossessed, it reflects on your credit as well. If you don’t make payments on the loan, the lender could take such drastic steps as suing you or garnishing your wages.
Think about it. A bank or finance company, which is in the business of lending money, has determined that it should not lend money to your friend or family member. It has looked at your friend’s or family member’s credit history and determined that they do not have confidence that he or she will repay the loan. When you cosign, you are giving the bank or finance company the confidence that YOU will repay the loan if (when) the primary borrower defaults. So, if someone needs a cosigner, consider it your notice that the bank did not believe that it could get its money back.
Despite this warning, many of you will decide to cosign for a loan anyway, so it pays to prepare for the worst-case scenario. The Federal Trade Commission recommends asking the lender to notify you directly if there’s been a missed payment or the terms on the loan change. Get the lender’s agreement to do so in writing. Also consider whether you can afford to make the loan payments if the primary borrower defaults. And, most importantly, consider whether you are prepared for the damage to your relationship with your friend or family member if you have to chase them for payments or if you have to end up making all of the payments.
If you can’t afford to pay off the loan, then–no matter how much you love them, how great their need, or how much you believe they will honor the agreement–you must say “no”. If you think they really need the money and you want to help, then give them a cash gift toward the purchase price of the item or service they are trying to purchase.
Of course, it’s terribly difficult to say no to your sibling, your best friend, or your child. There may even be hurt feelings when you decline to help them. Bear in mind that those hurt feelings are nothing compared to the bad feelings and relationship problems that you will have if you have to ask them for loan payments at the dinner table.