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One of the best financial tips you will ever get is to never cosign for anything for anyone. Banks view the cosigner as the ‘sucker’ that will inherit and be legally responsible for the loan payments when the loan goes into default.
Why Banks/Companies Want a Co Signer
When somebody applies for a mortgage to buy a house or a car loan to buy a car or applies for a student loan. And that person has a bad credit score or zero credit, banks will usually require a Co Signer to finalize and approve the loan.
It’s a pretty safe bet that when someone with a bad credit score applies for a loan, they will most likely default on the loan. They have been financially irresponsible in the past, so why should now be any different? The banks aren’t stupid and they are fully aware of this. I believe this is a major reason why credit scores exist, to see who will pay their bills on time and those who don’t.
The banks will not just issue a loan to anyone. They want to make sure the person they are lending their money to can pay them back. If the person has a bad credit score, they charge an even higher interest rate and in some cases, additional fees.
But that’s not good enough. The bank also needs someone to cosign on the loan to finalize the deal. Again, banks aren’t stupid. They will get their money back and then some when everything is said and done.
When the person defaults on their loan, guess who the banks will go after? You know it! The cosigner of the loan is now legally responsible for paying the loan back. They will go after the cosigner like there is no tomorrow.
Just Say No!
I know it is difficult when somebody you care about asks you to cosign for them so they can buy the car of their dreams. Or the home that they’ve always wanted but you both know they can’t afford. Especially if that person is your own kid or a close family member.
But do yourself and everyone a favor and just say no if you are asked to cosign for anything. If you don’t, you will live to regret it. I’ve heard horror stories from people that have cosigned for a loan which has ruined their lives later on.
If you are the cosigner of a loan, it is impossible to get out of it. Even if the person who took the loan out has not yet defaulted on it, you will still be unable to get your name off as the cosigner.
I know a story where a college student tried to get his mother’s name off as the cosigner of his student loan. He did not want his mother to be legally responsible for paying back the massive amount of loans he had accumulated over the years. His conscience kicked in and realized this way after the fact. But the financial institution that issued him the loan would not allow it. So his mother is now forever tied to paying back his student loan debt. And there is nothing that could be done about it.
If a bank is requiring a cosigner for a loan, that usually means the person applying for the loan cannot afford whatever it is they need the loan for. So don’t do it.
What You Should Do
If somebody asks you to cosign for a loan for them, just tell them no. Tell them they need to save more money and improve their credit score. Once both of these things happen, the bank will no longer require a cosigner for their loan when they reapply at a later time.
It’s difficult enough for many people to maintain a healthy financial life for themselves. Why add the pressure of paying for someone else’s choices and their mistakes?
I think the whole idea of cosigning is messed up, but I understand why banks do it. They are in the business of making money. Just don’t fall into their trap. Also, don’t be an enabler for people that really can’t afford the things that they want. You need to learn how to say no to them because if you don’t, you’re the one that will end up paying for it (literally).
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