NEVER Co-sign a Loan! Part Deux

Never co-sign a loan.  No ifs, ands, or buts!

In a previous posting, I mentioned that you should NEVER, EVER Co-sign a loan.  Ever, ever, ever, ever, ever!  Ever!

In response to that posting, I got a few inquiries, "Well, yes, but what about..."  NO.  Which part of NEVER did you not get?

And people who ASK YOU to co-sign are not your friends, but are the lowest sort of scum of the earth who want to take THEIR financial troubles and make them YOURS.  And they will, too, as your credit rating is destroyed - even if they pay back the loan.  And guess what?  They won't pay back the loan.  The bank already decided that - which is why they denied the loan without a co-signer.

When someone asks you to co-sign a loan, or if they ask to "borrow" money, just find new friends.  Once you turn a friendship into a financial transaction, the friendship is ruined for good.  Even if they pay it back (they rarely do) the balance of power is shifted.  And they will ask you, again and again, to be a bank.  Just walk away, you don't need friends like that!

If you really want to give someone a new car or a house, that is your business.  But don't think by "co-signing" you are just loaning them your signature.  YOU ARE LIABLE FOR THE FULL LOAN AMOUNT AND WILL LIKELY HAVE TO PAY IT OFF.

And I am not alone on this - just google "Never Co-Sign a Loan" and see:

Why you should never co-sign a loan - MSN Money

articles.moneycentral.msn.com/.../WhyYouShouldNeverCoSignALoa..."You should never co-sign a loan," says Lynn Brenner, a personal finance columnist. If the primary borrower gets behind in payments, "the bank will come after ...


Why You Should Never, Ever Cosign a Loan for Anyone - Megan ...

www.theatlantic.com/...never-ever-cosign-a-loan.../239775/by Spencer Kornhaber · More by Spencer KornhaberJun 1, 2011 – I mentioned in my last post that cosigning loans is risky. How risky? According to the FTC,…


4 Reasons You Should Never Cosign A Loan | You Have More Than ...

youhavemorethanyouthink.org/4-reasons-you-should-never-cosign-a...Aug 19, 2009 – Picture it. On a blistering cold evening in the winter of 2005, I received a frantic phone call from a family member whose loan application had ..


Living Stingy: NEVER co-sign a Loan!

livingstingy.blogspot.com/2009/04/never-co-sign-loan.htmlApr 6, 2011 – Never EVER co-sign a loan! It could bankrupt you! In my "Never Buy A Condo!" article, I noted that the title was a bit tongue-in-cheek, as there ...


Never Co-Sign A Car Loan For Anyone

www.moneycrashers.com/never-co-sign-a-car-loan-for-any...by Gyutae Park · More by Gyutae Park This particular story was a man who called in to tell about how he helped a friend from church get a loan on a car by co-signing for the loan.  He never thought ...


The Simple Dollar » Never Cosign a Loan Unless You Want to Pay It ...

www.thesimpledollar.com/.../never-cosign-a-loan-unless-you-want-to...May 11, 2010 – NEVER EVER co-sign a loan. Don't do it out of love or money. There is a good reason why the bank won't give that person a loan without a ...


McArdle Warns, 'Never, Ever Cosign A Loan' : NPR

www.npr.org › News › Opinion Jun 7, 2011 – Deciding whether to co-sign on a loan is a complicated mix of emotion, personal relations and money. Megan McArdle, business and ...


Never co-sign a loan, especially for family members.

www.trulia.com/.../never_co-sign_a_loan_especially_for_family_me...Oct 18, 2009 – Never co-sign a loan for someone, especially family. Taking out a loan for yourself is bad enough, but co-signing a loan is just plain stupid.


Should I Cosign For a Loan? - Faithful With A Few

knsfinancial.com/should-i-cosign-for-a-loan/Apr 25, 2010 – In fact, many people will actually cosign for loans even when they do not feel comfortable doing it. It is usually due to not wanting to be the bad 


Suze Orman's Top Five Money Mistakes You Can't Afford To Make ...

www.forbes.com/.../suze-orman-top-money-mistakes-private-student...6 days ago – “Never cosign a loan,” counsels Orman. “Once you have cosigned, you cannot get out of it–even on your deathbed.” Financially, there's nothing ...

Even the "Sooze" agrees with me on this one.... and she lists it as NUMBER ONE in her all-time TOP FIVE financial mistakes!  If you don't believe me, listen to the other folks above.

But why is asking someone to co-sign a loan so EVIL?  Because they don't really NEED the money (no, not really, ever, ever!) but are asking someone to risk ruining their credit rating and to eventually pay off their loan for them, so they can have a new car, or a house, or in one scenario provided by a reader, speculate in real estate.

The person asking you to co-sign is a greedy selfish person who wants it all now, even after they have already screwed up their finances.  And they have no compunction about taking you down with them.  A respectable person would not come to YOU with their financial problems, but instead man-up to their issues and figure it out on their own.

You are not their bank, their counselor, or savior.  But surprisingly, a lot of people like to "help others" and then nail themselves to the cross when it all goes horribly wrong.  They love the attention of being the "savior" of the person they are helping, and then being the "victim" later on.

And the "Well, but..." excuses go on and on, including an odious comment I got from one reader who said they had "a really good reason" why co-signing was a good idea, but "didn't have enough space here to explain why" - and then went on for five paragraphs flaming me.  The absence of real argument is the telling part.  They have no real excuse - or at least one that can't be pulled apart easily.  Here are some of the idiotic reasons I have heard people give to co-sign or to ask someone to co-sign.  All of them are pretty stupid:

• But what if they are a "really nice person?" who would never default?  It doesn't matter.   People don't default on loans to be mean, they do it because they can't make the payments - and the bank has already determined this will happen.  They will likely default on the loan, be too ashamed to tell you, and by the time you find out, your credit is ruined, as are your finances.  And "nice people" don't ask friends to co-sign loans!

• But what if they have a good credit report?   Then they don't need you to co-sign.  If they are asking you to co-sign, then they don't have good credit.

• But what if it is for a really good reason?  What reason would be good to borrow money?  None.  You should only borrow money for major things in life - like buying a home.  But if you can't afford a home, RENT ONE.  There is no "right" to home ownership, particularly for insolvent people.

• But what if they are "of good moral character?"  People with good moral character have good credit - and don't ask friends to co-sign loans.

• But what if they are "really good friends?"  Really good friends don't ask people to co-sign loans.

• But what if they are going through a bad time, financially?  Well, now YOU are going to be going through a really bad time financially.   Borrowing money isn't a way out of financial trouble, it is only pouring gasoline on the fire,

• What if they need a "second chance" in life or need to "build up their credit rating" ?  You are just risking your own financial security so they can  have a Camaro.  Who is going to bail YOUR ass out?

• What if they need a co-signer for a student loan? The only student loans that would need this are odious "private loans" that are usually touted by worthless "for profit" schools.  Walk away from these.  Federally guaranteed student loans do not require a co-signer.  Whenever you see this argument raised on the Internet, the person raising it is likely a shill for the lucrative for-profit college industry and/or private student loan companies.

• But what if they need a car to get to work (usually at a new job)?  Well, buy them an old beater.  Or give them your car and buy a new one for yourself.  But don't just buy them a new car, because that is what co-signing is.  And why do these sorts of odious parasitic scumbags always "Need" a brand-new car?  Oh, yea, it has to be "reliable."  Right.  Gotcha.  Not!

• I want to buy a house and I found a deal where I can buy a place, rent out part, make money and then flip it for a profit - but my credit is no good.  I need a co-signer.   Sorry, no sale again.  What you are proposing is a risk-taking financial venture - using someone else to take the risk at no cost to you but great risk to them.  Either go in as partners on the deal (titling the property jointly) and agreeing to a split of the proceeds (yes, providing your credit rating should be worth something!) or let them take the risks.  Otherwise you are a real selfish bastard.  Bear in mind that you are wiping out Granny's ability to borrow, as her debt/equity ratio will now be high.

• We are starting out and want to buy a house, but don't have credit.  Again, where does this "We have to OWN a home" bullshit come from?  And if your credit sucks, whose fault is that?  Rent for a few years - everyone does it when they are young.  Well, everyone with honor and dignity. Cheesy people ask their parents or grandparents to co-sign for them, and then wipe them out financially as a "thank you" gift.

• I want to sell our house to our son, but he doesn't qualify for a mortgage.  Well, hold the mortgage yourself, then, and have him pay you directly.  Your credit rating won't be destroyed, and you will get a steady source of income in retirement.  Or just keep the house and rent it to him.  Either way, you are guaranteed money, but don't have to worry about losing it all.  If you co-sign the mortgage for him, and he stops paying on the note, you all lose out.  And you can't even stop the bank from tossing him out on the street, unless you want to make a difficult mortgage payment.  If you are landlord or mortgage holder, you at least have the option of forgiving late payments for your child.  If you co-sign a mortgage and then invest the money (ouch!) you are letting the banks make huge profits at each end of the transaction and then losing all control of the situation, AND ruining your credit rating.  Sorry, no sale here, either!

• My friend has medical bills from a long illness - I want to help her out.  Well, now they are YOUR medical bills, and now YOU have to pay them.  And now, likely, BOTH OF YOU will end up in Bankruptcy court, instead of just her.  She could have discharged most of those medical debts in bankruptcy and started over.  Now both of you will have to start over, and likely you will no longer be friends.  Friends don't ask friends to do shit like that - borrow money or co-sign, or whatever.

You get the idea.   No matter what "good reason" you come up with, there is always an alternative - usually a better alternative - that doesn't involve you co-signing loans.  If a person is facing bankruptcy, let them face it.  Help them out if you can, but signing your life away isn't going to make it better for either of you.

Giving a young kid a brand new car is just irresponsible and teaches them only that the best things in life are truly free when grandma pays for them.  When you die, they will end up bitterly disappointed people after they burn through your inheritance and ends up destitute, as they never learned fiscal responsibility.  And you were the enabler of the whole deal.

So you co-signed a loan already.  What can you do?  Nothing really.  You are proper fucked, utterly, royally, and completely.  You can stay up nights for the remainder of the loan period (for a mortgage, that means forever) and worry about it.  This will lower your life expectancy by five years, easily.  You can hope the person who asked you will pay back the note.  The Federal Trade Commission says this is very unlikely - there is a 75% chance you will be stuck paying off the note.

There is nothing, repeat nothing, you can do at this point other than to hope the person who took out the loan has the cash to pay it back and the willingness to do so.  You have placed your entire financial life, your financial future, your retirement security - everything you have in life - in the hands of someone who every bank in the country thinks is fiscally irresponsible.  Brilliant move!

Do you see NOW why this is such an utterly, totally, bad idea?  Why I say NEVER and mean it?

If it was for a car, you can't repossess the car.  All you can do is pay off the loan - or default yourself and end up in your own financial trouble.  You just bought you friend, grandchild, or child a car, even though you can't afford one yourself.   If all you got dinged for was a $20,000 car and a destroyed credit rating, well, you got off lucky.  Maybe you can find some chump to co-sign for you?  Ha-ha.

If it was for a house, you can't toss them out of the house or force them to sell it.  All you can do is pay off the loan - or default yourself and end up bankrupt.  And since a mortgage is for 30 years and the amounts due can be in the hundreds of thousands of dollars (and since houses can go upside-down) you are going to be utterly screwed, as the mortgage company comes after you with a $50,000 judgement and then puts a lien on your house.

You can declare bankruptcy, but even then, the loan amount may be "worked out" and not written off. You may still have to make payments, even post-bankruptcy, for five years or so.  And you may lose a lot of your assets in the interim.

Suicide or changing your identity are really the only ways out of this mess.  Both are illegal and not recommended.

Do you start to see why this is such a bad idea?  When killing yourself is the only option out of a financial difficulty, it tells you volumes.

You see, as co-signer, you guaranteed the note.  This means you said you would pay for it.  And if the person who asked you to co-sign takes the car and drives off to Tijuana, then you are stuck paying for it.

What happens if you don't make the payments?  Same thing as if you had taken out the loan yourself, except since you don't have the collateral (car, house) you can't sell it to pay back the loan - and you can't force the other person to sell it, either.

So, they get a judgement against you - and they will, as there is no legal defense you can use (ignorance is not a defense, although some lawyer will take your money, represent you in court, and you will lose anyway).  They can then attach a lien to YOUR house or YOUR car.  How much fun will that be?  Living in a homeless shelter and taking a bus to work, driving by your friend's house and seeing them wax the car you paid for?

You're just fucked, period.  It is too late to say, "I'll never do THAT again!"  It is too late to stop playing the Hillbilly fucking financing game.  Your best friend just took you out, financially, and there is nothing, repeat nothing, you can do about it.

And this happens all the time.   Listen....

Billy was a college dropout and worked odd jobs.  He finally got a "good" job making $25,000 a year in construction.  He spent most of this on rent, beer, and pot.  He drove an old economy car, but dreamed of having a shiny new Camaro. 

One day, driving by the dealer, he stopped to look at his dream car.  There was no way he could afford it - it would cost a year's salary!  And he had not held his job very long.  And since he had screwed up badly with credit cards in college (and was in default on his student loans), his credit rating was in the trash.  He was a horrible credit risk and a very irresponsible person. 

The salesman shows Billy how he can "afford" the car if he can get a co-signer on the note, as, after running Billy's credit, he realizes that even the "buy here, pay here" people won't touch him. 

Billy was disappointed.  But Billy wanted to get laid.   And the waitress at the bar he frequented would surely go "all the way" with him if he had a cool car.  But before he could screw the waitress, however, he would have to screw his grandmother. 

His grandmother lived in a double-wide outside of town.  It was paid for, and  she got by on her meager savings and her husband's social security.  He had died years earlier of a lung ailment, probably related to all the junk he inhaled when he worked at the steel mill. 

She also had the tattered remnants of the pension plan her husband was supposed to get, but thanks to Bain Capital, was only 40 cents on the dollar.  And yea, she and her husband both voted Republican.  Thank God that Billy won't get Gay-Married!   Grandma isn't all that bright, I'm afraid.  Although she is a sweet lady. 

Billy goes out to Grandma's house to pitch co-signing the loan.  He visited Grandma frequently, and she liked the company of this handsome young man. The fact that he usually had some pitch for money when he came didn't disturb her too much.  But the check register of her checkbook contained a lot of entries to Billy for various amounts from $25 to $1000, every month, like clockwork, as Billy's sister would discover, to her horror, several years later, after Grandma died destitute. 

And let me just interject here that Billy is indeed a real person.  I knew this guy - and plenty like him (or her).  He is a low-life.  Scamming your Grandma or asking your parents for financial help, is sort of odious.  Doing it for wants and not needs is worse.  Doing it well into your 40's and 50's is just embarrassing.  But a lot of people do it.  Ick people, I call them.  They are so.... icky.

So, Billy arrives at the trailer and pitches the loan papers to Grandma.  She isn't loaning him money, just putting her name down, sort of like a character reference, he explains.  Grandma, already getting senile, goes along with the deal.  Billy also got Grandma to write a check for the down payment as well - with a little left over to buy weed!  Sweet! 

The arguments used by Billy are the usual ones.  "But, Grandma, I need a reliable car to get to work!"  Grandma is happy Billy is finally working, as he was a "troubled child" - actually just trouble.  And Grandma knows what it is like to have an unreliable car.  After all, when she and her husband got married, all they could afford were old jalopies that constantly broke down. 

Grandma fails to make the connection, though, that she and her husband did just fine, nevertheless, and didn't buy a brand-new car in their entire lifetime.  They struggled and saved and scrimped and worked hard.   And here she was handing a brand new car to a 22-year-old. 

Billy gets the car.  He might even get laid.  Who knows?  Who cares?  But the cost of insurance is staggering for a young kid with a new car - thousands of dollars a year.  And even though Grandma co-signed the loan, Billy has to make the payments - which are $400 a month. 

Billy gets a few tickets showing off.  He is young and immature, and there is a reason young kids should not have new cars.  He has a small accident and dents a fender, but is afraid to report it to the insurance company - his rates are staggering and he already is about to lose his license. 

Billy's bills are piling up. He is living the high life, drinking every night, smoking pot, trying to pick up girls.  Then he gets laid off from his job.  He showed up late and hung over - if he showed up at all.  Hey, he had a new Camaro, he didn't need those fools! 

But now he was broke, and the loan payments couldn't be made.  Pretty soon, debt collectors were calling his bewildered grandmother and demanding payment on the loan.  Billy didn't answer Grandma's calls. 

Grandma, barely getting by as it was, now finds herself strapped an additional $400 a month for another 48 months.  Billy has a sweet ride!  Grandma is eating cat food.

A far-fetched scenario?  No.  Three out of Four people who ask someone to co-sign end up defaulting on the loan.  You should make plans on how to make the payments before you co-sign, period.

But wait, it gets worse.  After Grandma eats Raman noodles for four years to pay for Billy's Camaro, Billy finally comes into some money - he gets a good job or inherits from his parents.  Will he pay back Grandma for the Camaro?

HELL NO, and she can't make him, either.  You see, co-signing the note is not a contract between Grandma and Billy, but Grandma and the finance company.  She has no right to go after Billy or his car. And even if Billy won the lottery, she couldn't get paid back.  And no, the Billys of the world rarely feel morally obligated to do so.  In fact, they never do.

People like Billy are evil, plain and simple.  And in addition to being a selfish low-life, he also is the worst sort of white-trash there is.  And co-signing is right up there with PayDay loans, pawn shops, and other trailer-trash Hillbilly financing schemes.

Co-signing is what poor people do, which is why they are poor.  If you want to stop being poor, stop doing poor things - and making poor choices.  Co-signing is a one-way trip to poverty.   Just...stop....doing...it!

And yet, some folks would say Grandma was being "selfish" if she refused to sign the note!  Some folks are truly evil!  Taking care of yourself is your first obligation.  NOT creating more "needy people" is the most important thing you can do.  Before you go out and try to save the world, save yourself.

And the worst sort of people on the earth are those who claim to be pious by "helping others" while placing themselves in perpetual peril.  Giving brand-new cars to your kids while bankrupting your own estate is not helping anyone.  It is just being idiotic.  And being around people like that is just depressing, as they moan on and on about how rotten life is, and how put-upon they are.  And yet, life is sweet and their problems are self-inflicted. 

And all it does to the person who gets the free car is teach them to be dependent - that if you want to borrow money, ask Grandma.  They never learn to live their own lives.  They are, well, icky! 

The reality is, there is NEVER, EVER a situation where co-signing makes any "sense" at all.   Get OUT of the mindset that borrowing money is a privilege - it ain't.  You have to pay it back.  And if you get a co-signer, they have to pay it back.

If your child gets into financial trouble, co-signing a loan for a new car is just rewarding them.  And it won't "repair" their credit rating.

Co-signing a loan won't "build up" a child's credit rating.

If your neighbor is broke and can't afford to live in their home, co-signing the note isn't going to "keep them in the home"  -  unless you want to make their mortgage payments for them.

We all face tough choices in life.  And sometimes, the best thing is to do without.  A child will be OK if they have to drive a used car, trust me.  They do not NEED a brand-new one.  In fact, it is a horrible proposition, just because of the insurance.

And co-signing a mortgage is just financial suicide.  If the person defaults, it could take out your whole financial estate.  Who will then bail YOU out?  Not the person who asked you to co-sign, that's for sure!

If you want to buy someone a house, at least make sure your name is on the DEED, so you can force them to sell the place, if they stop making the payments.  But few co-signers think to do that.

There is NO, repeat NO situation where a person's life can be improved by BORROWING money.  If someone comes to you and says they are desperate to borrow money, what they really need to do is learn to live on less.  Borrowing more - on your credit rating and your signature - is not going to make things better for them.

But it will surely make things worse for you!


UPDATE:  12/22/2012:   People have asked me, "well, what about STUDENT LOANS?"

Well, what about them?  Federally guaranteed Student Loans do not require a co-signer.

PRIVATE loans, which are TOXIC do.  Just don't take them out!

Who will pressure you to take out a Private Student Loan?  An odious "for-profit" college that will give your kid a worthless degree that will never qualify them for any job that will even remotely help them pay off a loan.

And even if your son or daughter DIES, you will still have to pay off the loan, like this poor immigrant found out the hard way.

Co-signing is a rip-off, no matter how you slice it.  When some agency suggests that you co-sign a loan, whether it is a consumer lending agency, a car dealer, or a for-profit school, RUN AWAY as quickly as possible.

NEVER CO-SIGN A LOAN, PERIOD!

[Continue reading...]

NEVER co-sign a Loan!

Never EVER co-sign a loan!  It could bankrupt you!

UPDATE:  April, 2012.  After reading this article, if you are still not convinced that co-signing a loan is a really bad thing (and people who ask you to do it are evil) read this article.  Every major financial adviser says to never, ever, ever, EVER do this - and for good reason!

* * *

In my "Never Buy A Condo!" article, I noted that the title was a bit tongue-in-cheek, as there can be situations where buying a Condo might be worthwhile, if you are careful and have realistic expectations.

However in this instance, when I say NEVER, I mean NEVER, period.  I am not being dramatic with the title here. Co-signing a loan is one of the worst financial mistakes you can make. Many people who get conned into doing this end up spending years repairing their credit and finances.


1. What does Co-Signing Mean?

If you apply for a loan and have bad credit or no credit, or are underage, the loan officer might suggest that you get a co-signer to the loan, if you do not qualify by yourself. Typically,this occurs with car loans, and typically, a parent, relative, or friend is approached to be a "co-signer" on the note.

Usually, most respectable banks and lending institutions won't suggest this step. However, the E-Z Money finance places are quick to make such suggestions, which speaks volumes as to the nature of co-signing. Co-signing of loans is more prevalent in the poorer sections of our society. Smart people don't get involved in this sort of thing.

To some folks, co-signing seems like a mere formality - you get another "name" on the loan just for formal purposes. When my partner was a manager of a food store, employees would regularly approach him, asking him to co-sign their loans for him, as if it were a mere act of notarization.

But, as we shall see, it is not. By co-signing a loan, you are liable for the full amount of the loan. In essence you are borrowing the money, since the person signing is not qualified to borrow it.


2. Why is it a Bad Thing?

The problem with co-signing is that you are wholly liable on the note, but have little or no control over the situation. If you co-sign on a child's car loan, the loan payment notices go to the child, and the child is responsible for making payments on the loan. If they are late paying on the loan, chances are you'll never know about it until the loan goes into default. At that time, you'll be contacted to make the payments, but by then, your credit rating is already dinged by the late payments on the loan.

So you end up at-risk, with no control over the process.


3. You are Liable for the Entire Loan Amount

This seems pretty simple, doesn't it? You are liable for the entire loan amount. If the borrower doesn't pay, you have to. If you don't pay, you can be sued for the balance on the loan and your credit rating destroyed.

Meanwhile, the borrower has a new car to drive around. Sweet deal for them, no? Unless you are prepared to buy your friend or child a new car, don't co-sign the loan.


4. It Dings Your Credit, Even If the Borrower Pays

If you co-sign a note, it appears on your credit report as a liability. So your available credit drops accordingly, along with your credit score. Even assuming your deadbeat friend makes the payments (and they are a deadbeat, the bank said so by refusing the loan in the first place!) your credit is affected.

Suppose the next year you decide that YOU want to buy a car? But now you find out, to your dismay, that you don't have the credit to get one, as you are "maxed out" by co-signing someone Else's loan. Like I said, NEVER co-sign a loan!


5. But My Child/Friend Won't Default!

Guess again. As we learned during the recent banking meltdown, there were sound and solid reasons why we had strict loan guidelines over the years for mortgages. People who put nothing down are more likely to "walk away" from a home that drops in value and are less likely to be able to make the payments.

When a bank turns someone down for a loan, it is because they don't think they are likely to pay it back. People miss this simple point, often thinking bankers are being "mean" or "unreasonable" by denying a loan application.

On the contrary, being turned down for a loan is sometimes the best thing a bank can do for you, as they are telling you that you need to get your financial house in order. Loaning money to you on onerous terms that will later bankrupt you is not doing you any "favors," but there is an industry of lenders out there willing to do just that.

Thus, if a bank turns down a friend for a car loan, and they come to you to "co-sign" the loan, you should turn them down, too. Why? Because people much smarter than you have already determined that your friend is a poor credit risk. If your friend pushes the matter, be sure to point this out to them - if the bank thinks they can't pay it back, maybe they should listen to the sound advice from the bank.

And if a friend pushes you to sign, threatening to end the friendship, then they are no friend to begin with. Chances are, the friendship will die as a result of co-signing anyway, as it all goes horribly wrong, and you end up buying them a car (and they tell everyone what an asshole you are for insisting on being paid back). Just cut to the chase and end the friendship now. You don't need white trash friends like that, anyway.


6. Most Co-Signers End Up Making Payments

The banks have it right. The person needing a co-signer usually cannot make the payments on the loan. As the co-signer, you should expect to make at least some payments on the loan, if not having to pay off the loan entirely.

Thus, if you co-sign a loan, there is a pretty even chance you will end up paying off some or all of the note. Since your friend who didn't make payments can't make the payments, chances are, they won't be able to pay you back as well. Once they fall behind on payments, they will continue to fall behind. They never "catch up".

And guess what? Chances are, you can't make them pay you back. By co-signing the loan note, you generally do not have legal rights to go after your friend for the missing payments or to take back the car. They own the car you paid off, free and clear. The loan papers do not give you any rights to go after your friend. Even if you could get some sort of agreement in writing, enforcing it would be expensive and difficult.

And of course, verbal promises from your friend to "pay you back" are largely unenforceable. And of course, they never pay you back.


7. So Why Do People Do It?

Because people are idiots, period. As I have noted before, people fall for all sorts of scams, rip-offs, or just plain bad deals. And often, many people fall into these bad deals because they think "well everyone does it, so it can't be that bad".

But like gambling, or rent-to-own furniture, just because a lot of people do it, doesn't mean it is a good deal. And in fact, those are horrible deals. And co-signing a loan is a terrifically horrible deal.

Many parents co-sign loans for their children to buy new cars, and this is a big mistake for many reasons. First, the parents will likely end up making payments on the car. Second, spoiling a child with a brand-new car is just wasteful. Third, until you turn 25, the insurance rates on cars are horrendous, so it makes no sense for a child to own a car that requires collision insurance. Many young people pay more per year for car insurance than they do for car payments. Fourth, when it all goes horribly wrong, the parents end up in debt and with a bad credit rating, and they themselves cannot afford to buy a new car.

And that is another irony of the situation. Many parents co-sign loans thinking they are "helping the child establish credit." But a co-signed loan might not really establish independent credit if paid off. And since it is more likely to go delinquent, it ends up ruining the child's credit rating, defeating the purpose of the exercise.

Another situation, as noted above, is when some naive person is snookered into co-signing a loan for a friend or acquaintance. As I noted, my partner, as boss at a retail store, was besieged by employees who wanted him to co-sign a loan document. Some people are so unsophisticated that they don't realize what they are signing. And not knowing what you are getting into is no defense down the road.

So yes, people do co-sign loans all the time. But people also jump off bridges all the time. That doesn't mean it is a keen idea. In fact, getting out of the mindset that "well, everyone does it" with regard to any financial situation is probably a good idea. 70% of all credit card holders carry a balance and pay interest every month. That doesn't make it a swell idea.


8. Nightmare Scenario

Susie and Betty were best friends since High School. They shared an apartment together and both had steady, if not high-paying jobs. Betty comes back to the apartment one day, bubbling over about a red compact car she saw on the dealer lot. Betty wanted to buy the car, but the salesman said her credit wasn't sufficient. If she could find a co-signer, she could get the loan.

Now Susie had a good credit rating. She worked part-time jobs in High School and learned how to save money. She had a department store credit card and paid it off every month. And she had a VISA card that she also paid off every month. She had good credit for a young person.

Susie was skeptical at first, but Betty convinced her to sign. "Come on, you know I need a car to get to work!" Betty said, "and that old clunker of mine is on its last legs! They just need another name on the loan to show I'm good for it!"

Not realizing what she was signing, Susie co-signed the loan papers and Betty came home with the sporty red compact the next day, complete with temp tags. For the first week, it was a lot of fun. Susie and Betty would go out driving and go to bars, with Betty showing off her new car. But things started going downhill rapidly.

Insurance on the car wasn't cheap, although insurance for young women is less than for young men. But Betty had a "lead foot" and got a couple of speeding tickets in quick succession. The insurance company quickly raised her rates, and suddenly she was paying more in insurance for the car than the monthly car payments.

Within a year, the aura of newness had worn off the car, mostly because Betty didn't take care of it and left it parked outside. And frankly, it was not much of a car to begin with. While it looked new and sporty in the showroom, the reality was, it was an econobox car that was not very well made.

Susie thought about getting a car of her own and went down to the same dealer. She found a similar car, and she and Betty thought it would be a hoot if they had matching cars, Betty's in red and Susie's in blue. But the salesman had bad news. Susie couldn't qualify for the car loan, as her credit was insufficient. The salesman showed her the credit report - listing Betty's car loan. Susie was shocked to see that it showed several payments over 30 days late, and the current payment unpaid for 60 days. Betty never told her about this!

"Well how about if Betty co-signs my loan?" Susie said. The salesman just snickered. Betty's signature was worth nothing at this point.

They returned to the apartment depressed, and Susie started to get a glimmering of what was to come. Only four more years left on the loan, she thought, and then maybe I can buy a car, too.

Betty's driving (and drinking) habits did not improve. She got another ticket, and then got into an accident. By this point, the insurance was so expensive that Betty had stopped paying it. Her insurance had lapsed by the time of the accident. The car was totaled, and the insurance company refused to pay off the loan.

Worse yet, Betty got a DUI in the accident and spent time in jail. She was spending every last penny on her legal defense, and had long ago stopped making payments on the now-totaled red compact. Betty borrowed Susie's car for her court appearances.

Susie got a letter from the bank stating that she had to make the payments on the car loan, which was now in arrears and the entire balance was due. This lead to a heated argument with Betty, a shouting match, and finally bitter recrimination. Betty moved out of the apartment and back in with her parents. The friendship was destroyed forever.

Living alone in the apartment was more money than Susie could afford. Adding in the cost of the car payments for the nonexistent car, Susie was in dire financial straits. She could make the payments for another four years, try to borrow the money from her parents, or declare bankruptcy. Her parents didn't have the money. Susie filed for Chapter 13 bankruptcy.

While Bankruptcy did discharge the debt to the loan company, Susie found it was much harder for her now. Job applications all asked if she had ever filed for bankruptcy, and this made it harder to find a job, particularly in accounting related fields, where she hoped to build a career. It would be years before the incident was wiped off her credit record. In the meantime, if she wanted credit, she could obtain it on only the most onerous terms - often 20% or more.

When she told her tale of woe to friends and acquaintances, she was not met with sympathy. Most chastised her for being so stupid. Others edged away, not wanting to be close to someone so irresponsible, and fearful that Susie would start asking them for money. Eventually, Susie realized that it was best not to mention her plight, and she kept it to herself.

* * *

NEVER co-sign a loan, period. If you do, your credit will suffer because of the outstanding debt. It will suffer further when the primary borrower is late on one or more payments. It will suffer further when they default on the loan. You'll end up on the hook for the full loan amount, and end up buying someone else a new car - while depriving yourself of one at the same time.

It is not simply a matter of "doing someone a favor". Co-signing a loan causes real damage to your finances. Just don't do it!

See also this MSN link.

A friend of mine just co-signed someone's mortgage.  If that person defaults, my friend has to make their mortgage payments for them - or end up in bankruptcy court.  But they can't force the friend to pay up - or even sell the home.  They are stuck, period, paying someone Else's mortgage for live.  What's not to like?

[Continue reading...]

The Jet Ski Trap

Jet skis lose their allure rather rapidly.

I pick on Jet Skis as sort of the epitome of silly purchases that end up squandering a lot of hard earned money. While I use them as an easy example, other types of purchases could fall along similar lines. Speed boats, "crotch rocket" motorcycles, snowmobiles, and ATVs come to mind as similar wasteful purchases. What these scenarios have in common is:

1. A seasonal or hobby item that is not really necessary to daily living.

2. An item financed (usually at a high interest rate) with "E-Z Monthly Payments"

3. An item that depreciates dramatically.

4. An item that loses its allure rather quickly.

5. An item that needs constant maintenance that the owner cannot provide.

Let's see how these aspects combine and collide in an all-too-typical example of the Jet Ski purchase.

Jeff is a well-off middle class suburban dweller. He is married and he and his wife have decent incomes working in office environments. While Jeff is very skilled in his narrow field of interest, he literally cannot change a light bulb without cross-threading it half the time.

On vacation, he rents a Jet ski for an hour, and on the ocean in front of the resort he is staying at, it seems like a lot of fun - jumping the waves in the hot summer sun. All too soon the hour is over, leaving him wanting more. If he had just rented for that second hour, he probably would have gotten Jet Skiing out of his system, as he realized that there is not a lot more to do, other than what he already had been doing.

On return from vacation, Jeff proposes to Marsha, his wife, that they buy Jet Skis. He's seen the ads in the paper, and for what he paid for an HOUR to rent a Jet Ski, he could make a monthly payment on one!

They set off to visit the Jet Ski dealer. Jeff did not do any research first, comparing prices and features and also figuring out what these things were worth. He also did not research the price of used Jet Skis in the local classifieds or boattrader.com

The Jet Ski dealer was all too happy to see them on a busy weekend. Jeff was immediately drawn to a display of two jet skis on a trailer in the middle of the showroom. A large sign proclaims "Low monthly price! As low as $199 a month!**". This sounds too good to be true, and as Jeff will later learn, it is.

Of course, that was the price for only one Jet Ski. The monthly payment for two was twice that. And of course, the Jet Skis will need a trailer, which the dealer is happy to sell them. Lightweight Jet Ski trailers cost only a few hundred dollars to make. But to Jeff, who has not idea what things cost, spending $2000 on a trailer seems like a reasonable proposition, as does spending $10,000 on a Jet Ski. Jeff and Martha leave the showroom having spent as much as, if not more than, they would have on a new car.

Of course, the Jet Skis will need to be registered and insured, and Jeff is shocked to realize that insurance is rather high for these items. He also has to take his car in to have a hitch installed and trailer light wiring installed. But within a week, all the loan paperwork is done and Jeff is pleased to go pick up his Jet Skis and head off for a weekend adventure! No mere hour-long rental, but a weekend full of Jet Skiing fun!

Jeff and Martha head over to the local lake and discover there is a long line to launch their Jet Skis on a Saturday morning. They finally get the Jet Skis in the water and after some initial messing around, take off from the dock. Other boaters angrily wave at them as they fly out of the launching area, oblivious to the no wake zone signs and roped swimming area.

Jeff and Martha discover the first negative about Jet Skis - other boaters hate them. Local landowners are annoyed by their loud buzzing sounds, and traditional boaters annoyed by their erratic unskilled and often unsafe drivers.

With a simple twist of the throttle, Jeff is now doing close to 70 mph on the water - a fairly staggering speed, considering most boats travel only 30 mph or so. He suddenly realizes that he is on a collision course with a bass boat. Panicked, he lets go of the throttle and tries to turn. With a horrible sinking feeling and pit in his stomach, Jeff realizes that the Jet Ski is still headed straight for the bass boat. Jeff discovers another problem with Jet Skis - when you release the throttle, they lose all directional control.

Fortunately for Jeff, the bass boat driver, having seen this scenario before, takes evasive action and avoids a deadly collision. Jeff is lucky. Every year, thousands of other Jet Skiers are not so lucky, and are either killed or maimed in such collisions. It is small wonder that insurance on these seasonal items can be so high.

Jeff learns his lesson and slows down and learns to take evasive action before coming close to boats or objects in the water - or land. He and Martha head off to an area where there are no boats and try out the new Jet Skis. They turn left and make circles. They turn right and make circles. They turn left. They turn right. Jeff comes to the realization that this wasn't as much fun as he thought. They have been on the water for only a half-hour, have pissed off all the other boaters in the area, and basically are having no fun.

There are no waves to jump, Jeff thinks, and after watching some other Jet Skiers, decide to find some boat wakes to jump. they follow a cabin cruiser throwing up a good wake and try to jump it. However, the jet skis do little more than bump over the two-foot wake and the boat's captain gives them an angry glance as they ride too close to his boat.

They ride some more. There has to be some fun in this, Jeff thinks, remembering the time at the resort. Or has he really "been there, done that" already? Having spend over twenty thousand dollars on these Jet Skis, he gets a sinking feeling, and thinks about the 59 months of payments ahead of them.

Martha sees an isolated section of water across the lake and suggests they head over there. They gun their engines and floor it across the lake, throwing up rooster tails. When they arrive, Jeff feels that maybe they have found the "fun" part, doing S-turns among the reeds in the shallow water and watching flocks of geese take flight ahead of their Jet Skis. But suddenly, Jeff's Jet ski sounds an alarm and slows down. The grasses have wound around the impeller and stalled the engine.

Martha pulls along side and Jeff looks under the seat, mystified as to how to correct the problem. Soon another boat arrives and Jeff is optimistic that help is on the way. Unfortunately, the boat is the local Environmental Conservation Sheriff, and Martha and Jeff are ticketed for riding their jet skis through a bird sanctuary and also violating wake zone rules. "I've had a number of complaints about you two" the Sheriff says, handing them the tickets. Jeff explains that they just bought the Jet Skis and the Sheriff shakes his head. He's seen this scenario many times before.

Using a short rope, Martha tows Jeff's Jet ski back across the lake. While it took them only minutes to get across under power, towing takes nearly an hour, as every time Martha tries to accelerate, Jeff's ski starts to swamp.

They get the Jet Skis on the trailer and leave, sitting in silence in the car on the way home. "Maybe next time will be better," Jeff says.

And it is, of course. They get the impeller unclogged at the dealer and Jeff learns a few basic maintenance procedures, like how to add oil to the oil injection system. The dealer is in no hurry to educate Jeff, because each costly mistake Jeff makes, out of ignorance, is another profitable transaction for the dealer.

They try other lakes and rivers and, having learned not to annoy other boaters and how to read the various signs and buoys, largely stay out of trouble. They take the Jet Skis to the beach and run them in the ocean water, which brings back a lot of the fun from their vacation. But still, it is not the continuous orgasm than Jeff expected, just a series of chores and tasks to get ready to go and to return - packing and unpacking equipment, food, beverages, and the like.

Unfortunately, Jeff hasn't learned half of the chores he needs to do. On the way back from one beach adventure, he is appalled when a wheel rolls by his car window - a wheel from his Jet Ski Trailer. It bounces across the median and narrowly misses an oncoming car. Jeff is lucky. Many more are not. Such wheels can pass through a windshield and kill an oncoming driver - it happens every year. Regular maintenance on a trailer is essential, and Jeff hasn't even washed his trailer since buying it.

Pulling off the road in a shower of sparks, he realizes that the wheel has fallen off his trailer. Having no spare, he leaves the now-crippled trailer by the side of the road and sets off to find a replacement wheel.

However, it is Sunday, and most of the stores are closed. Not knowing the wheel and tire size anyway, he has no idea what tire to get. He finally calls a tow truck to come out and pick up the trailer. Even if he had a spare, it wouldn't have made a difference. Since Jeff never lubricated the hubs on this trailer, the salt water attacked the bearings and cause the axle stub to shear off. Not only did Jeff need a new wheel and Tire, he needed a new axle as well. This scenario plays out with predictable regularity on the roadways of the USA. On any given Sunday, you'll find at least one similarly crippled Jet Ski trailer on the side of any Interstate Highway.

Since the trailer is not covered by his roadside assistance, he has a hefty $400 towing bill to pay, as well as the repairs to the trailer. Jeff is discouraged. Maybe they should sell the Jet Skis. After owning them a year, he goes online to see what he can get for them.

Jeff is shocked. He checks the local classifieds, the local boattrader.com, and the NADA used boat values. The retail value for his Jet Skis is thousands less than he owes on the loan. He calls the dealer he bought them from. The dealer is all too willing to take them back - as a trade-in on a newer, more expensive model, provided the deficit in the payoff is folded back into a higher interest "negative equity" loan on the newer models.

If Jeff wants to sell his Jet Skis, he'll have to PAY $3000 to get rid of them. Since he lives as a "salary slave" from paycheck to paycheck, he doesn't have $3000 to pay off the deficit on the loans when he sells the Jet Skis - if he can sell them at all.

So the Jet Skis sit on the trailer in his side yard, gathering mildew and algae, while the trailer tires go flat. Martha has lost interest in Jet Skiing, particularly now that a baby is on the way. Jeff, too, has found Jet Skiing to be less than he thought it would be.

Unfortunately, the Jet Skis continue to depreciate faster than the balance on the loan declines. Jeff and Martha make five more years of payments on this expensive mistake. Sitting in the side yard, unused, the engines languish, the vinyl upholstery fades and cracks, and all the rubber pieces start to craze and rot.

High revving two stoke engines rarely last long anyway, which is one reason Jet Skis depreciate so quickly. Few jet skis are still around that are more than five years old. You may see some brave soul with some engine fix-it experience nurse one back to life. But for the most part, they crash and burn after a relatively short life.

Jeff and Martha donate the Jet Skis to a local charity for a tax write-off once the loan is paid off. The charity sells the Jet Skis and trailer at auction. The Jet Skis are sold for parts by their new owner, who is interested only in the trailer - which he uses to haul his lawnmower, after mounting a piece of plywood to it.

What was the overall cost of this financial fiasco to Jeff and Martha? In addition to the $22,500 paid for the Jet Skis and trailer, there is the staggering $10,000 in interest payments. Throw in repairs, registration, property taxes, and the like, and you have a bill of $40,000 or more for few weekends of fun. Jeff and Martha can ill afford such waste, particularly that they now have children.

Could Jeff and Martha done anything differently to prevent such a scenario? Yes.

To begin with, they could have just said "no" to buying a Jet Ski. While renting one may seem expensive, in terms of cost per hour, it may be cheaper overall. Moreover, you are not committed to years of payments for something that might only catch your fancy for a few days or weeks.

They might also have looked at buying a real boat. For less than the cost of a jet ski, Jeff and Martha could have owned a small boat. While a Jet Ski provides you with minutes of endless fun, turning left and turning right, you can do much more with a boat. You can fish from a boat, waterskii, wakeboard, tube, camp, cruise, party, or whatever. You can invite your friends on a boat - or family members. Moreover, a regular boat depreciates more slowly than a jet ski.

They also should have looked into paying cash for such a purchase, buying the Jet Skis secondhand. Since there are so many Jet Skis out there like Jeff and Martha's, where the buyer loses interest fairly quickly, you can buy them relatively new and in good shape, for a lot less than new ones. But you have to find a seller who is not "upside down" on his loan, and since these are hard to finance if you are not going through a dealer, you generally have to pay cash.

Frankly, for such a luxury purchase as a Jet Ski, boat, RV, or whatever, it probably is a good idea to pay cash. That way, you are less at risk of being "upside down" on a loan, and can dispose of the item at any time, regardless of how badly it has depreciated.

It is better to sell a used Jet Ski for half of what you paid for it, than to make 6 years of payments and then sell it for scrap. Yet this latter scenario is played out in back yards all across America - as consumers pay off loans on RVs, Boats, Jet Skis, Motorcycles, and the like. Now that the recession has hit - and hit hard - you cannot give away luxury items like these. But it is a good time to pick one up - secondhand.

Lastly, Jeff and Martha should have taken the time to learn how to maintain such equipment. You CAN own "toys" like a Jet Ski or a motorcycle or an RV or a Boat, on a budget, provided you don't have to run off to a dealer every time it breaks. If you cannot take care of an item to prevent it from breaking, and if you cannot do basic maintenance on an item when it needs maintenance, then maybe you should re-think owning luxury items involving machinery.

Jeff and Martha learned an expensive lesson relatively early on in life. But one wonders, when you consider the educational background both Jeff and Martha have, why they would make such a costly mistake at all?

* * * *

P.S. - while the plural form of Ski was, I thought, Skiis, it appears the plural of Jet Ski is Jet Skis, which makes no sense to me and sounds like it would be pronounced "Jet Skiz". "Personal Watercraft" is the generic term, but rather awkward.

[Continue reading...]