Just How Smart is Co-signing a Debt?

“A man devoid of understanding shakes hands in a pledge,
And becomes surety for his friend.”
Proverbs 17:18

The biblical terms “shakes hands in a pledge” and “becomes surety” means that a person co-signs on someone else’s debt. In the business community, this also relates to a loan guarantor who has no collateral or control. Co-signing, simply put, is a risky and unwise personal and business practice.

This bible verse is a strong words against, what seems to be, an acceptable and routine practice in our society.  However, to imply that a person lacks understanding is an accurate assessment of the level of fiscal wisdom most people don’t exercise when it comes to co-signing. In light of the complexity of this subject, the next few articles will continue our exploration into the practice of guaranteeing someone else’s debt.

I believe it is fairly safe to say, many of us have asked someone to co-sign for us on a purchase at some point in our lives.  Or perhaps, you have been asked to co-sign for a family member or friend.  Maybe you were trying to help them establish their credit for the first time or help them recover from a financial meltdown.  The intentions, both ours and theirs, were probably noble and sincere.  Frankly in our culture, most people don’t think of co-signing as being something unwise to do or something to be avoided. 

Some experts estimate that 75% of primary borrowers default on their obligations, leaving the well meaning co-signer holding the bag.  This default rate should not be a surprise. After all, the borrower needed a co-signer because the banks thought they were a ‘credit risk’. They were considered precarious, either because they already had too much debt or because they historically didn’t pay their bills on time. So, a decision to co-sign has to be emotionally justified and caution has to be ignored.

Never-the less, for many, co-signing is thought to be acceptable.  In many cases, co-signing is encouraged among family and friends, but in reality the co-signer lack understanding of the ramifications they are putting themselves into. When you co-sign, you are willing to give another person control of your life by allowing them to decide if they will re-pay their debt or default and let you re-pay it for them.  This practice has many other unintended consequences.

True friendships are valuable and are to be preserved at great cost.  So, consider the impact co-signing a friends’ loan might have on your relationship. You might feel it necessary to constantly remind your friend to ensure they pay on time. What if you do this for months before the loan is paid off?  What kind of effect will that have on your relationship? 

What happens if your friend defaults? Suppose that friend or sibling fails to pay, sticking you with the bill? That’s something that will certainly damage your credit in the process. Now, what about the irreparable damage to your relationship? The damaging effect that a default has on cherished relationship is one of the biggest disadvantages to co-signing a loan. It is always better to consider other ways you might help a friend or family member who finds themselves in a financial bind.

I realize that this is very difficult advice to receive.  Because, telling someone “NO” who requests that you to co-sign for them can be very challenging.  This is especially true if it is a good friend or a loved one with major financial challenges.  I understand the desire to help is a strong emotion in making these kinds of decisions. Our next article will deal with more discussions and some possible options to this highly charged dilemma.

Thoughts to Ponder

1. If a family member or friend asks you to co-sign for them today, what would your answer be, and why?
2. Do you think there are any justifiable occasions to co-sign?
1. If so what are they?  
2. If not, why not?
3. Is this the first time you have heard this kind of advice?
4. Do you believe the wisdom of God’s Word knows best?