Can you cosign this loan for me?

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Here is an article that I wrote for the November issue of the Living Financially Free Ministries newsletter. With credit money getting tighter, a lot of people that shouldn’t be getting loans, because they can’t afford them, are going to be looking for someone to cosign the loan for them. If a friend or family member asks you to cosign a loan, what should you do?

Most people that take out a loan understand the details they are agreeing to: monthly payments, with interest, until the full loan amount is repaid. Sounds pretty simple. The only catch is the person loaning the money has to feel comfortable that the full loan amount will actually be repaid. If not, the loan is not granted or the lender requires a cosigner. Here is where things really start getting ugly. Most people that require a cosigner look to their family for help. After all, what kind of person would you be if you told your little sister that you won’t cosign the loan that she has to have in order to get that cute little sports car that has her name “written on it”?

Let’s take a look at what the Bible says about cosigning a loan. In the book of Proverbs, we find that God has some pretty strong ideas about becoming a cosigner.

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

Pretty simple. If you cosign for someone, the Bible says you are devoid of understanding; or in contemporary terms, you are stupid. And if you stop just for a minute and try to determine why the bank is asking for a cosigner in the first place you might not be so stupid after all. The bank is requiring a cosigner because your friend or family member has already been determined to be a risk at repaying the loan. If the bank doesn’t trust them to repay the loan, why do you?

So if you shouldn’t cosign the loan, what should you do? Encourage them to save up and buy the item. They may have to step down in car to get something that they can afford, but everyone involved will be much happier than if the loan goes into default because someone can’t make the payment.

This article is listed over at the “Carnival of Personal Finance – Financial Armageddon Edition!“, along with some other great articles. Check them out.