Transcript
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Ralph: Have you ever felt pressured to put your name and financial reputation on the line to co-sign a loan for a family member or friend?
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Did you pause beforehand to prayerfully?
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Consider all the risks?
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Associated with this monumental decision.
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That's going to be our discussion for today.
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So this is a show you don't want to miss.
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Welcome to our motivational Monday show.
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I'm so glad you chose to join us.
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I just want to thank you for listening and supporting the program today.
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We're taking a deep dive into the serious implications.
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Of co-signing a loan for someone else.
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While, it may seem like an act of generosity on its surface.
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To help out a loved one by co-sign this decision requires a lot of careful thought.
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Wisdom and discernment beforehand.
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In today's episode, we'll explore the pitfalls of co-signing exactly how it works.
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Steps you can take to protect yourself if you do.
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Co-sign.
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And signs.
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It may be wise to graciously say no.
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If asked
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my goal is pretty simple today, I want to equip you with the knowledge to make an informed decision.
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So let's get started.
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But before we get started, remember today is tax day.
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So if you've not already filed, it's time to make sure you file an extension.
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I did an episode a couple of days ago about that.
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So check that out and don't forget to file that extension so you don't get penalized by the IRS.
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And while we're here, don't forget to subscribe to the show and join our email list.
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You do that at askralphpodcast.com . So you don't miss tomorrow show.
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Now tomorrow we're gonna be talking about, are you losing money?
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By doing delivery services like DoorDash or grub hub or so many other ones I'm going to talk about.
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Does that actually make you money?
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Let's start with today's Bible verse.
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Proverbs chapter 22 verse 26 offers us this warning.
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To not be one who shakes hands in pledge or puts up security for debts.
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That one is pretty pressing my friends.
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So let's talk about today's topic when you co-sign for a loan.
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You're linking your finances together and putting yourself on the hook.
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If the primary borrower fails to repay it's, what's called joint and severally liable in legal terms.
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So first it's critical to understand that co-signing a loan makes you equally responsible for repayment.
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If the primary borrower misses or makes late payments, it damages your credit score and your credit history.
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Missed payments can quickly snowball leading to collections calls hounding you.
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Lawsuits wage garnishment and even property liens filed against you.
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Once you co-sign you've sacrificed control of the situation.
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Unfortunately, I've seen this play out with many of my clients.
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They thought they were doing there.
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Child a service or a grandchild is service, but always gotta be careful about that.
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So number two, recognize that.
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Substantial risks are involved in this.
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Here's some interesting data that I found data shows default rates for co-signed student loans.
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Are nearly three times higher than non co-signed student loans.
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Here's another one.
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50% of auto loans that are co-sign end up becoming delinquent.
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That's scary.
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hurting both signers credit.
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And mortgages have a heightened default risk when co-signed for someone with already poor credit.
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What do you do when you got to carefully consider if the person has the financial means and willingness to repay before linking your finances together?
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You basically are marrying this person as it relates to credit.
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So third, have an open, honest conversation with the potential borrower about specific repayment terms, you've got to lay out your expectations and then put those things in writing.
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It's very important to do that.
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Lay out the monthly payment amount.
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The exact due dates and timeline you expect for them to refinance a loan solely in their name once possible.
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See, that's one of the things I think you have to do if you're going to do one of these co-signs I think first of all, put it in writing layout, all the expectations.
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But put in a date when they're going to refinance this loan into their own name.
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And if you set these clear mutual expectations upfront, it will prevent misunderstandings down the road.
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Now here's a fourth thing I say.
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Only co-sign if you can independently afford to take over all the payments yourself without financial hardship, if necessary.
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What am I saying?
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There Ralph?.
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What I'm saying is you have to take a look at this and say, if this person quits paying, could I pay this on my own?
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If you can't, then don't co-sign.
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Don't let yourself get pressured into overextending your finances in jeopardizing your credit worthiness, because if you do, it will impact your future needs.
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You gotta be very cautious about co-signing for a spouse as well during divorce proceedings.
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It can put you in a really vulnerable position.
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So really pay attention to that.
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If you can't afford to make those payments on your own.
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then I personally wouldn't co-sign for that loan
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and now fifth.
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Make the payments yourself on time.
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If the primary borrower falls behind or misses payments.
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This protects your own credit if they become unreliable.
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And unfortunately I've seen it in my practice.
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Sometimes this happens.
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You've got to monitor the loan account regularly for any issues you don't want to wait till you get that call from the lender saying, Hey, by the way, your friend that you co-signed for quit making payments three months ago.
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If you're having to make payments is a clear red flag that the co-signer can't be trusted to follow through.
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And that's when you really have to look at what can we do to fix this problem.
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Number six, be proactive in detail and exit strategy in your written agreement on how the co-sign loan obligation will be removed from your name within a set timeframe.
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So for example, let's say that you're going to co-sign for a car loan.
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Let's say that car loan is a five-year car loan.
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One of the things you might put at the front end of that is say, listen, when this reaches two years.
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That will be two years with a payment history.
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You're going to need the refinance that, and then you've got to push the primary borrower to, refinance the loan solely in their name once their credit improves.
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This restores your financial freedom and limits that ongoing risk exposure.
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It's kind of like, a financial divorce.
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Now let's explore some safer alternatives to co-signing that benefit both parties.
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Let's say you've decided it's not going to be a good fit for me.
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Here are some things you could do.
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One of the things you could do is give the portion of the money towards a down payment instead of co-signing the entire mortgage.
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This helps them get approved while limiting your liability.
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So if you find someone's asking you to help them by co-signing for a mortgage, one of the things you might want to do is just gift them the money.
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Another thing you could do is pay off a smaller, existing debt completely, rather than co-signing a large consolidation loan.
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This improves their debt to income ratio, which may very well get them approved for the loan.
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And they would need you to co-sign at all.
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Here's a great other thing you can do.
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You can refer a borrower to credit counseling services.
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I'm going to be doing a show about that coming up in a week or two.
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This can help them improve their credit score and qualify on their own.
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Later, you see a theme here, folks, we're looking for ways to not have to get you to co-sign that loan.
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Another thing you could do is help the borrower research lending options like secured credit cards and credit builder loans that don't require a co-signer.
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Help them build their credit, send them to our show.
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We've got a ton of episodes out there where we talk about how to rebuild your credit.
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And if you can, here's another option offer to make a few payments sporadically when they're struggling.
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This is usually safer than an ongoing liability of co-signing.
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The theme here is to give them a hand, but don't put your name on the signature block.
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Guide the borrower on budgeting and saving tips to build up a larger down payment over time.
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So they avoid the need for a co-signer later.
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The truth is folks as Christians, we're called to be generous and to help others in need.
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However, hastily made financial decisions can end up hurting your ability to steward your resources.
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well, So you've got to seek wisdom through prayer and godly counsel before even considering co-signing for a loan.
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And carefully consider if alternative ways exist to support the borrower without overextending your finances.
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And linking them permanently to your credit with thoughtfulness and discernment.
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You can make decisions that honor both parties involved.
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And the book of Proverbs chapter 17, verse 18, it says one who lacks sense, gives a pledge and puts up security in the presence of his neighbor.
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While coming from a good place, co-signing a loan for someone lacking financial wisdom can harm you both.
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And my goal today is to keep you from getting harmed.
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Before we wrap up I want to remind all of our listeners to visit our podcast page, you do that at askralphpodcast.com . There you can leave us a review.
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Share your thoughts, or even send us a message with questions for future episodes.
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We'd love to hear from our listeners while you're there to make sure you join our email list.
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So we can send you our daily email with what's going on next on the show.
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You can also schedule a consultation, if you need to, discuss your specific circumstances.
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And if you haven't filed an extension, go to our website, you could do that as well.
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Now here's something I'd like you to do.
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I'd love for you to share this episode.
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If you know someone who's considering or already has co-signed for a loan for someone share this episode with them so they can learn some techniques to make sure they don't get in a bad way financially.
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So let's have a bit of a recap.
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cosigning a loan for someone else is a monumental decision that indelibly links your financial reputation to theirs.
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That's just the truth.
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You are marrying them financially.
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You've got to be very cautious before taking this step, have an in-depth conversation on precise terms and mutual expectations.
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You've got to lay this all out.
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Only co-sign.
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If you can independently shoulder the entire financial burden yourself, and as always seek godly wisdom in prayer, while being open to alternative ways, you might be able to help them without co-signing.
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And again, please visit our Ask Ralph podcast site.
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That's at askralphpodcast.com for all of our financial resources and episodes.
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Listen folks with wise counsel and biblical guidance, you can make financial choices that honor God.
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Thank you for joining me today.
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Stay financially savvy out there and may God bless you abundantly.
