Don’t Co-sign For Anyone, Ever

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Don’t Co-sign For Anyone, Ever

This morning, I am here to tell you never to co-sign for a loan.  There are no exceptions.  None. Nada. Zero. Zilch. Null. Nil. Zilde.

Don’t Co-sign For Anyone, Ever

Co-signing for a loan looks like a free way to get a loved one credit, but it is not free. Consider two articles I ran across yesterday:

Qualivian Investment Partners 2Q22 Investor Letter

TD1655 Newsletter Placement 1Dear Friends of the Fund, Please find enclosed our Q2 2022 investor letter for your review.  Qualivian reached its four-year mark in December of 2021. We are actively weighing investment proposals. Please refer to our Q2 2022 investor letter for our performance and commentary on the second quarter of 2022. A fact sheet is 

Being a co-signer is one of the weakest economic positions imaginable. You get no benefit from the loan that is made, but you are liable for full repayment of the loan should the primary debtor refuse to pay. You also have no recourse against the primary debtor.

If you think the one you love is deserving of credit, loan it to them yourself, with a formal loan agreement that allows you to require repayment, or seize collateral.  At least you have some protections here.

What’s that, you say?  You would never take them to court?  Well, then understand, whether you lend or co-sign, you are exposing yourself to loss.  Perhaps it would be better to say to the one you love: “I’m sorry, honey, but lending money destroys relationships. Loan agreements are adversarial by nature.  I want to always be your friend, so I can’t lend you money.”  The same applies to co-signing.

What’s that, you say?  You can’t afford to loan the money, and so must co-sign?  Garbage.  Go borrow the money yourself, and then lend it to them.  You will be better protected than if you co-signed, even if it makes the loan costs explicit to you.

And, if you can’t easily get a loan, why are you letting someone else, however beloved, endanger your well-being?  Don’t be sentimental/dumb.  If you are that hard pressed, tell your beloved the tough truth — “I’m sorry, honey, but we don’t have the resources for it, wish it were otherwise.”

Student Loans

I write this for one more reason. Student Loans are not dischargeable in bankruptcy, unless one can prove hardship, and that is difficult to prove.  If parents have the resources, it is better to lend to your children directly than take out student loans, with their onerous interest rates and payment obligations. You might also then encourage your young adult to be frugal/wise in choices including the school attended, “because we are in this together.”

This method has the virtues of avoiding the hooks of the student loan programs, and reducing total costs where possible. The Federal (not private) student loan programs have one “virtue” — income-based repayment, which varies program-to-program. Attractive if a student thinks he isn’t going to make a lot of money, not so attractive if he thinks he will make a lot of money.  But, at least it gives a better chance of staying out of bankruptcy court.

Conclusion

There are difficulties that come when love and money mix in a bad way.  If you can’t get it done with reasonable protections for you as the lender, don’t make the loan.

And, don’t co-sign, ever.  As we say in investing,”Hope is not a strategy.”  In the same way, don’t co-sign, hoping that everything will turn out okay.  The downside is considerable if it does not because there is nothing you can do to get the one you co-signed for to repay or make amends another way. And it will affect your finances, credit rating, and most of all, your respect and love for the one you tried to help.

Don’t co-sign, ever.

By David Merkel, CFA of alephblog

David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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