Never Cosign a Loan
First, let me put this in context: unless you are a buying a home or car with your spouse, do not cosign any loan. That is, if a relative, any relative, even your parents, siblings, or children come to you asking that you cosign a loan for something that will not be a shared asset, the answer must be 'No.'
I have previously explained in Should I Lend Money to Relatives? why lending money will destroy relationships.
However, I have come across a few websites that recommend cosigning a loan if the relative in question is honest, responsible, has the ability to repay and a proven track record in other financial dealings.
Nonsense! If they have all these qualities they can get the money from a bank and they have some nerve hitting you for the funds.
And if you do cosign, what happens if they stop making payments to the bank? You will then have to continue making the payments. But suppose then money is tight for you, who will you borrow from then? If anything goes wrong, it's your credit that will be damaged.
Now if they stop making payments, unless you stop as well, the bank will not go after anyone. So how will you get your money while Uncle Jake or Sister Amy is driving around in a car that you are making the payments for? Will you feel comfortable bringing legal action against your own son, daughter, sister, brother, uncle or aunt?
What's better, that they not get into a new car or that you repossess it later? That they be temporarily upset with you or that they despise you for all time?
Here's another problem: suppose they die? Who gets the proceeds from the sale of the car, house, business or whatever you lent on? You are on the hook while the widow or widower continue to use the asset. Unless you have legal documentation to cover these situations, you will get the shaft.
Since I recommend against cosigning on a loan, let me mention some alternatives. If it's for a business idea, suggest to Aunt Mabel that she consider social lending. Check out this video if you've never heard of it before.
But suppose it's not business related, suppose Uncle Harry needs to buy a car for work and you really, really, really believe he'll pay you back and you don't care anything about my warnings about the pitfalls of lending to relatives? Well then consider companies like Virgin Money which will take your money, lend it to your relative, and administer the loan so that it works just like at a bank, but allows you, the lender, to set the interest rate (if the loan is over $10,000 by law you must charge interest at the Applicable Federal Rate), and determine the loan term. An additional plus is that Virgin Money can report the loan to Equifax to help your relative build his or her credit rating.
The cost for this service is a one-time $99 setup fee (plus $9 per payment). Virgin Money creates the personal loan agreement, manages the loan, and transfers the payments from the borrower's bank account to yours.
Relatives are less inclined to ignore making payments if it's formally structured as a bank loan. If they encounter a short period where they cannot make the entire payment, you can set it so that only interest payments need be made. And should they completely default, at least your credit rating won't take a hit.
There are other companies that supply similar services: Loanback, Green Note (for student loans from a student’s friends and family), Zopa, and Lendingclub.com (a peer to peer lending service to Facebook members).
Always consider the purpose of the loan. Unless it's for a one-time true emergency, or for a good purpose (student loan), lending money to a relative facilitates bad behavior and allows their problems to perpetuate.
Disclaimer: I do not and will not receive any compensation from any corporate websites mentioned in this article.
