Co-signer Beware: Altruism Can Wreck Your Credit
By Erica Sandberg
December 21, 2011
My brother’s car broke down last month and he called to ask me to co-sign on a loan for a new car. I am married, and I know my husband would not want me to do it. But if I insisted, he would say yes. (We’re both working so it’s not just his money.) However, I’m nervous because my brother has had a history of substance abuse. When he was using, he wore his credit out and it’s so bad now that no one will give him credit again. He’s sober now and working hard and taking care of his two kids. He has custody of both. He needs a car to get to his job and care for his kids. I feel I’m in a terrible position. Would you co-sign to him if you were me? Any other recommendations for us are greatly appreciated! Thank you very much. — Jeannine
Turning away a loved one who is trying to get his life together can be gut wrenching. You want to help, but you don’t want to jeopardize your own financial situation in the process. Further complicating the dilemma is your spouse. While considering his opinion is important, it also adds weight to this emotional tug of war.
Would I co-sign on a loan in this circumstance? No, probably not. It takes a long time and hard work to create a strong credit rating, and I’d like to preserve it.
There are other risks involved as well. For example, if the agreement was that he would make the payments but he didn’t do so, the bank would hold me responsible for the unpaid loan. Worse, if I somehow didn’t get wind of the delinquency and the car was repossessed and then sold at auction, I could be on the hook for the deficiency balance and possibly be sued for the debt. The very thought of that gives me the shivers.
But before you think I’m being cold hearted, I would try to assist in other ways. Here is how I would approach the situation — and think you should do the same:
1. Know you can say no.
It’s easy to feel pressured by familial bonds, but remember that you’re an adult and make your own choices. Put simply, you are under no obligation to sign financial documents for your brother.
2. Explore alternatives.
Though I wouldn’t share my credit rating, I might lend some cash. He could use it to buy an old car outright, for a down payment on a newer vehicle or to repay collection accounts (which will improve his credit reports and scores). If you go in this direction, draw up a contract that sets terms, such as the monthly payment amount and consequences for breaking the agreement.
3. Respect your marriage, but retain your economic individuality.
If you do want to become a co-signer or lender that’s fine. Because your husband might not agree with your choices, talk about it with him at length and outline your position. If he doesn’t see things your way, though, ultimately it’s your call. I believe that each of us has an inherent right to do what we feel is best with our earnings.
4. Make a decision.
Now it’s time to tell your brother of your intentions. If lending your credit rating or your cash makes you too uncomfortable, say “no” firmly (you don’t want to lead him on by being wishy-washy), and explain why. Do not let guilt sway you. A confirmed and extended history of substance abuse is reason enough to deny his request. Conversely, if you’re OK with offering your good name or money, have a written agreement ready and if he agrees to your terms, both of you need to sign it.
I wish your brother a life of permanent sobriety and economic well-being.