Saturday, March 3, 2007

Co-signing - Possibly the Most Stupid Financial Move Ever

Did you ever wonder why banks make someone financially responsible co-sign a loan?

I used to. Since I never took on debt, it didn't really matter to me. Then one day it hit me like a ton of bricks: it's because the bank realizes the borrower will not make their payments.

Not exactly E=mc squared.

So I starting asking folks: Have you ever co-signed a loan or had someone co-sign for you? How'd that work out?

4 out of 5 people who co-signed loans ended up making payments for the person for whom they co-signed.

For the vast majority, it was a lot of the payments. Try "the vast majority".

I also learned while at Capital One that their internal estimate is around 65%.

If someone wants you to co-sign, follow this 2 step process:

1) Ask yourself "Would I be willing to make a gift of this money to this person to help them out?"

2) If the answer is yes, give them the money. No strings attached.

If the answer is no, don't co-sign. If you do, statistically speaking you will be giving them the money. Plus interest, fees, a messed up credit score and several years in the financial wilderness to boot.

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