Have you ever loaned a friend money? If you’re like many people, you found out that he wasn’t planning on paying you back anytime soon. Not before buying himself Guitar Hero, that new graphic novel, and definitely not before his big vacation.
But loaning cash isn’t the worst financial mistake you could make. There is one big mistake that I never want you to make: Never co-sign a loan for a friend or relative. Okay, you may think I just don’t care about other people, but I am looking out for you.
Who has to make the payments? When you co-sign a loan, you’re telling the bank (Lender) that you are responsible if your friend (the Borrower) doesn’t make his payments. That doesn’t mean they expect you to nag your friend for them until he agrees to pay. It means they expect you to pay the loan off. Anytime he doesn’t pay, you have to pay.
What’s the worst that could happen? That would be when your friend doesn’t tell you he’s not making payments. You won’t know the loan is past due until the Lender contacts you, and your credit report is already damaged. You not only have to come up with two or three payments right away, but your other loans (Creditors) may already know that you (not your friend) are late on your obligation to pay off a debt. See, your creditors don’t care about your deal with your friend, they just see your name and a past due loan. That means that all of your creditors could increase your interest rates on totally unrelated accounts. Can they do this? Oh, yes. Your credit card could go from an affordable interest rate of 10% to over 30%, making it nearly impossible to pay off.
That’s why you should never co-sign a loan. It’s better to help a friend learn how to fix his credit so he doesn’t need a co-signer than to drown in debt along with him.