It’s tough to establish yourself financially, so I understand when people seek help from others.
Sometimes, the appeal for assistance is asking someone else to co-sign a loan. My rule if you ever get such a request? Don’t do it. Ever. But recently, I offered some suggestions on setting standards, should you decide to co-sign anyway.
I have an occasional Color of Money feature called “Talk Back,” in which I allow readers to offer counterpoints to something I’ve recommended. But this time, the vast majority of the feedback were stories of co-signing gone terribly wrong. I’d like to share a few of them.
One reader wrote: “I co-signed two student loans for my girlfriend some years ago, and, of course, we are not together anymore, and I haven’t spoken to her for a few years now. It was a long, 10-plus-year relationship and ended with acrimony. I unfortunately have student-loan debt of my own – much higher than hers – and, while it appears she does pay her loans, rarely does she do it on time, and I receive calls from her bank.”
And here’s a cautionary tale from a woman who gave in to a friend who begged her to back some medical-school loans.
“At the time, she promised to switch the co-sign to her father after a year,” the reader wrote. “He was unemployed and couldn’t co-sign. Well, I’m still on the loans, and there’s still a huge balance on them. I still get alerts when the payments are late. And I learned my near-perfect credit had a blemish on it when I bought a house. When I ask her about taking me off, she says she’s really sorry but the loan agency won’t let her. Is this true? Is there anything I can do to untie myself from her loans?”
Both readers asked the same thing: How can they get removed from the loans? I recommended they contact the lenders to see if there is a co-signer release policy and, if so, what the requirements are. There are usually a number of conditions that must be met, including that the primary borrower has made a certain number of on-time principal and interest payments. In these readers’ cases, the primary borrowers are frequently paying late, which shows why they needed a co-signer in the first place. So why would a lender release them, given the loan histories?
Finally, a Maryland woman shared a story about her uncle, who co-signed for a neighbor so she could purchase a car.
“He knew her and had loaned her money before, which she always repaid,” the niece wrote. “But she often took long periods of time to repay - major warning sign, which he ignored because he is a good guy and has a hard time saying no.”
The neighbor didn’t have a car, and the uncle was giving her rides to work, so “when she wanted to buy one, he thought that was good.”
Things were OK for a while. The neighbor paid the loan as agreed.
“But she didn’t pay the insurance,” the niece wrote. “Next thing he knew, my uncle was getting notices from [the state Motor Vehicle Administration] because the tags were revoked due to the lapse in insurance. Unknown to him (only because he didn’t read the contract when he signed it), the car was in his name with her as a co-owner. When he contacted the dealership, they told him his credit was better than hers and so they had put not only the credit, but the car, in his name.”
The MVA came after them both in court for more than $1,000 in fines.
Because the uncle was the technical owner of the car, he was also responsible for the insurance lapses. He ended up having to pay all of the fines.
Here’s the epilogue: “My uncle finally got his name off of the vehicle but not without some hassle. The woman couldn’t make the payments, and it was repossessed. That still isn’t finished, but [the lender] won’t be able to touch my uncle on it. He is a senior citizen, and his only income is Social Security. He has no possessions that can be sold, etc. So, while they may get a judgment on him, they won’t collect from him. The woman thinks she is in the clear, but I’m sure the lender will turn its attention to her once they understand my uncle cannot be touched.”
If the bank, which has more money than you, isn’t comfortable with lending someone money, that’s a huge red flag.