2-Minute Money Manager: If I Co-Sign a Loan, Can I Protect Myself?

Co-signing a loan means putting your credit on the line for someone else. You shouldn't do it -- but if you ignore that advice, here's how to do it right.

2-Minute Money Manager: If I Co-Sign a Loan, Can I Protect Myself? Photo by pathdoc / Shutterstock.com

Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about lending money; specifically, whether you should co-sign loans and — if you do — how to protect yourself.

While virtually everyone offering financial advice urges you to resist the temptation to co-sign, that doesn’t stop people from doing it. I’ve even done it myself.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “Ask Stacy: Is It Possible to Get Out of a Co-Signed Loan?” and “Think Twice Before Co-Signing for Your Kid’s School Loans.” You can also go to the search at the top of this page, put in the word “loans” and find plenty of information on just about everything relating to this topic.

If you’d like to shop for a personal loan, you can do that here. And if you need anything from a better credit card to help with debt, be sure to visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to the “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this two-minute answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.

Today’s question comes to us from David:

“A good friend of mine who I trust is asking me to co-sign a loan for them. I know I shouldn’t, but it’s hard to say no. What’s your advice?”

Well, David, I’ve got three things for you:

Thing No. 1: Co-signing a loan isn’t a great idea

Boil it down, and the reason you’re being asked to co-sign a loan is because someone in the business of lending money is saying this borrower is too risky to lend to. Sound like a recipe for success?

Remember, if the borrower doesn’t repay that co-signed loan — or make the payments on that credit card, car loan or mortgage — you’re on the hook. Even if they die, you could be on the hook. So, you’ve got to be super-careful.

I’ve been approached to co-sign loans, and I’ve actually done it before. But if you’re considering it, here’s a frightening statistic: According to the Federal Trade Commission, 75 percent of people who co-sign a loan end up paying all or part of it. Not exactly great odds.

Thing No. 2: Protecting yourself

Despite the obviously sage advice I’ve offered, a certain percentage of us will ignore it. That’s just human nature. So, if you’re going to plow ahead anyway, one thing you should do is see if it’s possible to get out from underneath the co-signing obligation at a later date. It’s rare, but it’s possible.

So, look for “co-signer release” language in the loan document. Sometimes, for example, if the borrower goes two years without missing a payment or being late on a payment, that can release the co-signer.

Like I said, it’s rare, but worth looking into.

Thing No. 3: When you loan, own

If I’m going to lend you money for a car or co-sign a loan on a car, you’ll find my name on the title somewhere. Same thing goes with any other asset securing a loan. If you’re responsible for the debt, be an owner of the asset. That way, if your borrower doesn’t pay, you’ve got some leverage.

If it’s a car, house or other similar purchase, you obviously don’t want to have any liability, so you’ll want to make sure the borrower is maintaining adequate insurance. You’ll also want to know if the payments are being made on time, and especially if they’re not being made on time. Remember, when that borrower is late, it’s the same as you being late, which could screw up your credit history.

Bottom line? Whether your borrower is your daughter, son, best friend or boyfriend, don’t approach lending or co-signing casually. If you’re lending, get a legal note (you can download one here) and have it signed and notarized.

In short, when you’re being treated like a bank, act like one.

You can read more about this stuff at MoneyTalksNews.com. Just do a search for “co-sign” and you can read till the cows come home.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Got any words of wisdom you can offer on today’s question? Share your knowledge and experiences on our Facebook page. And if you find this information useful, please share it!

Stacy Johnson
Stacy Johnson @moneytalksnews
I'm the founder of Money Talks News and have spent the last 40+ years in the personal finance trenches. I'm a CPA, author of a few books and multiple Emmy recipient. I'm ... More

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