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Ask Chuck: Should I Co-Sign A Loan?

By Chuck Bentley

Dear Chuck,

So, I cosigned for a student loan and now I’m stuck paying for it. Is there anything I can do?

Regretful

Dear Regretful,

Unfortunately, the same thing happened with my Dad and we have not found a satisfactory remedy. He was approached by an employee whose son needed assistance to get a “head start in life.”  Because my father wanted to help and believed the story that the young man would respect those who helped him do what no other family member (of this boy) had ever achieved, he cosigned for a large student loan. As soon as the boy graduated, his mother quit her job at my father’s company and he never heard from either of them again. He was conned.

It’s easy to make an emotional decision when trying to help a friend, family member, or person in need. But trouble brews when emotions overrule God’s Word. When someone cosigns for a borrower who is honorable and responsible, payments are made in a timely fashion and no problems occur. But, when someone does not pay on time, either by choice or by circumstances outside their control, the cosigner is stuck, sometimes completely unprepared to pay the balance due.

Surety and Cosigning Defined

Surety is the principle of taking on an obligation to pay or to make a pledge for an obligation. When a borrower cannot get approval for a loan, a cosigner makes it possible by loaning their creditworthiness, thus reducing the risk for lenders. Cosigners are simply people with decent credit and credit history who guarantee payment of a loan should the prime borrower fail to make payments.

Responsibility of Cosigner

  • Subject to all payments and late fees the primary borrower does not pay.
  • Cosigned loans or credit cards are listed on credit reports.
  • To communicate with the borrower to encourage, remind and praise timely payments.
  • Get a notification if payment is not made.
  • Know the state’s laws on co-signing.

Consequences for Cosigner

  • Late payments negatively affect credit scores.
  • A legal judgment can be filed if the loan goes to collections.
  • Wages can be garnished until the debt is paid in full.
  • If the primary borrower files bankruptcy, a cosigner must pay the balance.
  • Possible tax liability.
  • Strained and possibly ruined relationships.

A Few Options

  • Tangible debt (as with a house or car) can be sold and the proceeds applied to the loan.
  • Borrower can refinance or consolidate the loan at which point a cosigner should bow out.
  • If left with the loan, cosigner should try to work out a payment plan with the borrower.
  • If left with the loan, cosigner should negotiate with the lender, refinance or consolidate for better terms.
  • Purchase term life and disability insurance for a student if cosigning student loans. 
  • Determine the risks to your own credit before cosigning for anyone.

Another Option: Cosigner Release

This is an important provision for some student loans. Upon graduation and once working full-time, former students should pursue cosigner release. There are numerous requirements but this protects graduates and cosigners in the long run.

What the Bible Says

Surety is the primary means our society uses to “buy now” and “pay later.” Many Christians, ignorant of what the Bible says, cosign because they genuinely want to help family or friends. But, one of God’s financial principles is avoiding surety. It keeps His people on the correct financial path and protects them from traps set by the world’s economic system. Those who take on surety pledge their future and presume upon God’s will.

One who lacks sense gives a pledge and puts up security in the presence of his neighbor. (Proverbs 17:18 ESV)

Whoever puts up security for a stranger will surely suffer harm, but he who hates striking hands in pledge is secure. (Proverbs 11:15 ESV)

The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty. (Proverbs 21:5 ESV)

When someone asks you to cosign, explain that it goes against Biblical principles. Use the opportunity to offer to teach basic personal finance, direct them to Crown’s online study, and explain that you want to avoid souring your relationship over money. If they do need a loan, suggest they consider the following options.

Ways to Get a Loan Without a Cosigner

  •     Build credit
  •     Pay down debt
  •     Fix errors in credit reports
  •     Add income
  •     Borrow less
  •     Search other lenders
  •     Pledge personal collateral

In Your Case

While you did not reveal your relationship with the original borrower of the student loan, most often this problem occurs between family members when the student looks to parents, stepparents or grandparents for help. Try to preserve your relationship with the one who has defaulted and left you responsible for the debt. Pray for them to have a change of heart or circumstances to enable them to take back over the loan at some point. Go so far as to ask how you can assist them in getting in a position to be able to take back the obligation for the loan. Since you have no other remedy that I am aware of, do your best to pay the note in full and ask the Lord to work it together for good in a mysterious way only He can do.

Thanks for asking your question. I hope your pain will help many others like you and my Dad avoid a similar plight. That would create some good out of it all. 

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Back-to-School Strategies to Stay Out of Debt

By Bonnie Spain, American Center for Credit Education

Q: I enjoy back-to-school shopping, but no matter how hard we try to avoid it, we always end up in debt. I don’t want to be paying for school supplies until December. Can you give us any suggestions to help us stay on track this year? 

A: Back-to-school shopping is the second-biggest shopping season, eclipsed only by the Christmas season. According to a study by Deloitte, 29 million households will spend an estimated 26 billion dollars on back-to-school shopping this year. Given this, it’s easy to see how back-to-school shopping can get out of control. Still, with a few easy steps, it is possible to rein in your spending and avoid the back-to-school debt trap.

First, take an inventory of what you already have for each child. Start with clothing: what fits and what doesn’t? If clothes still fit and are in good condition, then you don’t need to replace them. Make a list for each child that reflects the clothing that he or she still needs.  

Next, inventory your school supplies. How many notebooks, pens, pencils, crayons, etc. do you have that are in good condition? When you have a handle on what you already own, download or pick up a school-supply list from your child’s school or at the store. Compare what you have on hand to what you still need.  

Take your list of clothing and school supply needs and create one master list for each child. Assign a dollar amount to each item on the list and then tally it all up. If this amount exceeds what can afford to spend, you will need to revise the dollar amount and maybe even the list. Visit with each of your children and find out what is most important to them. Pare down your list to reflect each child’s priorities. Having a plan, in this case a written list, is half the battle.

When you’ve got a solid list, it’s time to shop. If possible, shop with one child at a time. Children often want what their siblings are getting, even it if doesn’t represent a need for them. Every child loves to have his or her parents’ undivided attention, and this is one of those opportunities. To keep emotions out of the equation, shop with your list in hand, and do not deviate from it.  

To get the best deals, watch for sales. And remember that you don’t necessarily have to purchase everything in a single trip. If your son or daughter has something new to start the school year, the rest may be able to wait. By waiting, your kids may change their minds or refine their priorities.

With a plan, back-to-school shopping doesn’t have to put you in debt until the holidays. Most of what children learn about money, they learn by watching their parents. So when it comes to shopping for fall, ask yourself: Will my kids see that back-to-school shopping puts us in debt and creates stress, or will they see us take control of our back-to-school shopping with a realistic plan?

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Budgeting, Credit, Credit Cards, Credit Score, Debt, Money Management, Saving, Student Loans

Top 9 Money Mistakes People Make

By Jim Garnett, The Debt Doctor

After counseling average Americans about their financial problems for many years, I noticed early on that there is a common set of money mistakes people usually make.

Money Mistake #1: Being comfortable with debt.

Why would anyone choose to be a slave if he could choose to be free? One answer is because, over a period of time, one seems to develop a “slave mentality.” They have never known freedom and have gotten used to being slaves.

There is a very real sense that being in debt makes us slaves. The wise King Solomon wrote, “The rich rule over the poor, and the borrower is slave of the lender” (Proverbs 22:7 NRSV). Many in our society have been in debt so long, they have cultivated a “debt mentality.” Because they have never known financial freedom, they grow accustomed to being in debt and accept it as “the normal way of life.”

But just imagine what it would be like to be out of debt and not have a mortgage payment or car payment each month? Just think what you could do with all that money. Out of debt, you would not need as much money to live, and you would be free to use this money which was once tied up in debt payments for whatever you wanted.

Just think of being in your 30’s or early 40’s and being able to have discretionary monies of $2,000 to $3,000 a month. You could put a sizable amount away toward car replacement, house repair, or future education needs. And imagine what it would be like to be able to write checks to your church or charities that are sizable in amount.

Being debt-free would allow you the freedom to grow wealth quickly and give substantially.

It is high time we stop treating debt like an old family friend that has moved in to stay with us forever! We need to kick him out and send him on his way! There is no reason to remain enslaved to debt when we can be free.

Money Mistake #2: Not knowing what we spend each month.

The only part of the budget process that many people know is the “what I make” part. Most people are totally in the dark about the “what I spend” part. This money mistake is one of the main reasons why 40% of Americans spend more than they make each month. Sadly, most of that 40% are unaware that they do.

How can this be? Because by using credit cards each month, an illusion is created that makes us think we are doing fine financially. After all, the bills are getting paid on time. This may be true, but if the credit cards were put in a drawer and not used for two months, the bills would not, nor could not, be paid on time. Without the constant use of credit, we would see that we are running out of money before we run out of the month.

Being smart with our money, no matter what amount that might be, includes knowing how much we spend in relation to how much we make. Using credit hides that fact from our eyes. Once we determine what we are spending, we can bring our spending in line with our earnings by either spending less or making more.

To get to a destination, we must know where we presently are. That’s why the first step in money management is always to know what we spend.

Money Mistake #3: Behaving like credit cards are money.

Many people say they know that credit cards are not money, but their actions betray their words.

A college sophomore once told me, “No matter how broke I am, I always have money in my pocket with my two credit cards.” Like many, he was confusing the “buying power” of his cards with money.

But when we use a credit card, we are not spending money but borrowing money in as much the same manner as when we take out a loan at a bank. The buying power of our credit card originates from borrowing money from a creditor – we call that borrowed money “credit.” If that credit is not repaid within a certain amount of time, a high-interest rate is added to the debt.

I am convinced that if we actually viewed our credit cards as the ability to borrow money – money that must be repaid – we would greatly restrain ourselves in their use.

Money Mistake #4: Being satisfied with only making minimum monthly payments.

Interest.com calculates that paying off a $2,000 credit card balance with an 18% interest rate at a minimum payment of 2% would take 288 months or 24 years to pay off. So, if at age 30 you closed the card and just paid on it at monthly minimums, you would be 39 years old when you finally pay it off! But note, you would not have paid just $2,000 but $6,396.40 because of the added interest charges. I don’t know about you, but I work far too hard for my money to spend it like that.

Money Mistake #5: Borrowing to “pay off” debt. 

Borrowing to pay off debt normally backfires! It has similar results to digging a hole in our front yard so we can fill in the hole in our backyard.

This “money mistake” yields some pretty disastrous results:

  • Our borrowing does not actually “pay off” debt – it merely moves the debt to a different location. Now we have a second mortgage on our home or a loan against our 401(k).
  • The debt we pay off by borrowing usually reappears within 3 years. This occurs because our borrowing makes it unnecessary to change our spending habits.
  • Borrowing against our home equity turns an unsecured debt into a secured debt. That’s why the interest rate is now less – the bank would rather loan against our house than loan against our name because it is less risky.
  • Borrowing against our 401(k) often has a 10% penalty if we are not 59.5 years old, plus the monies we borrow are taxed as income. At times, 40% of the monies taken from a 401(k) loan will “disappear” in penalty and taxes.
  • If we move again, our house produces very little profit because we have increased the mortgage balance, plus there is little to put down for a down payment on our new home.
  • When we are old enough to retire, we often cannot because our home is not paid off. We still have house payments to make because we borrowed against it to “pay off” debt.

Borrowing to pay off debt does not decrease our debt, and often we are worse off than we were before.

Money Mistake #6: Co-signing a loan.

It’s great to help somebody get a loan, but it’s critical to understand the risks before doing so. There’s a reason the lender wants a cosigner: The lender isn’t confident that the primary borrower can repay in full and on time. If a professional lender isn’t comfortable with the borrower, you’d better have a good reason for taking the risk. Lenders have access to data and extensive experience working with borrowers.

The co-signer promises to repay the other person’s debt if, for any reason, he does not. The liability assumed is for 100% of the debt, thus, if $5,000 is the total amount borrowed, the co-signer is responsible for the entire $5,000 if the other person defaults.

Also, the co-signer’s credit score can be affected if the primary signer makes late payments or misses payments on the loan. Currently, 75% of student loan co-signers end up making payments on the student loan.

Money Mistake #7: Having no emergency savings.

A recent survey asked people if they could get $2,000 for an emergency. The results revealed that 55% of the respondents said they could get the money within 30 days, but 92% of those people said they would need to borrow the money from family, friends, bank loans, or credit cards.

Another survey revealed that 28% of the 1,000 people surveyed have absolutely nothing in savings. In other words, many people are simply not prepared for emergencies.

Money Mistake #8: Creating debt for tax benefits or to establish credit.

Debt for Tax Benefits. It is good to claim every deduction that you can on your taxes, but it is often not good to spend money in order to get a tax deduction. An example would be the deduction one is allowed to take for interest paid on a mortgage loan. If I paid $10,000 of interest and was in a 25% tax bracket, I would receive a tax deduction of $2,500. If I absolutely had to pay the interest, I would surely deduct it. But if I had the choice of paying my home off and having no interest to pay, that would be my choice by far. I would rather have the $10,000 non-spent money in my hand than receive a $2,500 tax deduction. I may pay more tax, but on the other hand, if I gave monies to charities, I would receive the same deduction. Remember, you often have to spend your money to receive tax deductions. If you are not careful, you can “tax deduct yourself into the poor house.”

Debt for Establishing Credit. One of my clients followed the advice of her financial counselor and bought a house in order to build up her credit score! In order to establish credit, you simply need to pay your bills on time. You do not need to maintain debt to do this. You can establish your credit just as well by paying your credit card balance in full each month.

Money Mistake #9: Thinking that good credit is the most important thing in life.

Good credit is important, but it is not the most important thing in life. The main benefit of having good credit is being able to go into debt with good terms. But what if we decide we are not going to go any further into debt and work out a plan to get out of debt and stay out of debt? Then the benefits of good credit are not nearly as important to us.

To me, the benefits of living debt-free are much more important than the benefits of having good credit. It is true that most people who live debt-free also have good credit, but it was not their good credit that allowed them to become debt-free. It was their living within their means and discontinuing the use of credit to create any further debt.

Mind you, I am certainly not advocating that one should have bad credit. I am simply stating that getting out of debt and staying out of debt is much more important than having good credit.

The benefit of observing and sharing these money mistakes is that they allow us to learn from the mistakes of others.

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