I had an interesting conversation recently about someone cosigning a loan.
Is it a good idea for a parent or grandparent to cosign a loan?
It's an act of one way to show love.
It's a way to help families try to get ahead.
We trust the signee, and we want to help.
I get it.
The conversation leads me to the foundations of our foundations of money. There are only five uses of money: you can Live with it, Give it, Owe in taxes, Owe in debt, and save it to Grow. In otherwords: Live, Give, Owe, Grow.
In short please use caution with co-signing loans, and have a plan to avoid it.
Cosigning a loan is a way a second person can sign as a financially responsible party. When a bank loan officer, credit card company, or student loan processor feels an individual does not have a safe enough financial balance sheet, they may encourage a cosigner on their loan. When you sign on a loan as a cosigner you are a guarantor of that loan. That loan will now affect your credit.
You become responsible for that loan, and are promising the bank that if needed, you will pay that loan.
There are several real circumstances you can see when the person taking out the loan may fall into financial hardship:
- They could lose their job
- They could get sick
- They could get tied down with other debt and bills and fall behind
- They could get hurt and not be able to work
- They can forget to pay
So, if it's probably not wise to cosign a loan, what else could you do?
One option is just to pay for the asset and have them pay you back. You become the bank and keep the title of the asset in your name. This way, if the payments fall behind your credit and liability would not be affected. Don't worry about making things awkward, if they were to fall behind on the loan things would be awkward anyways.
Gift the money.This might be the simplest option. There's no tax deduction here, you're just going to keep your family member free of debt and will avoid being put into a predicament.
Buy the cheaper option. This is especially applicable when buying a car. Instead of getting the "car that is exactly what they want", buy a cheapo for them. This should give some runway to allow saving without the looming debt.
The alternative is putting your wallet on the line anyways. Throwing off your long-term financial plan. Realizing pain that could have been avoided.
But what if you've already cosigned a loan? Try to get out. Beg if you have to. Having that weight, losing sleep, having stress, it's not worth it. Proverbs 6 says to "deliver yourself, since you have come into the hand of your neighbor." That advice says to do it now.
This is easy to decide ahead of time.
If you have a family policy of no co-signing loans, then when you are asked (likely with a sincere and enthusiastic attempt) the answer will come naturally and guilt-free.
That's planning ahead and being intentional about debt.
It's something that I know can be done.
If want to talk through a cosigning scenario and think of creative and intentional resolutions, give me a call. We can do this together.