Co-signing for someone is just not worth it

Just say “no.” That’s the simple reply to a request from a relative or friend to co-sign on a loan. It’s one of my absolute money rules. I will not be linked financially to a loan for anyone other than my husband.

I can’t say this often enough, and yet too many people still co-sign loans. Look at this recent survey from CreditCards.com:

28 percent of co-signers saw a drop in their credit scores because the primary borrower paid late or not at all.

38 percent of co-signers had to pay some or all of the loan payments because the person didn’t pay.

If your income isn’t high, you’re more likely to be pulled into a co-signing nightmare. The survey found that 58 percent of co-signers who make less than $30,000 a year had to pay some or all of a credit card bill or loan.

Most co-signing requests were for auto loans, followed by personal loans, student debt and then credit cards. About half of the people who co-signed were parents.

Don’t do it. Here’s why:

You are not a backup borrower. You are equally responsible for the first agreed-upon payment to the last.

If the loan or credit card isn’t paid, the lender can start collection actions on you right away. Don’t believe that lenders first go after the primary borrower and then the co-signer. Most likely, it’s “let’s go after the person with the better potential to pay.”

If collection actions are pursued, you could end up paying late fees and even have your wages attached.

Late payments and collection actions are reported on your credit report too.

You may be limited in your ability to borrow because, as a co-signer, you’re on the hook for the debt.

Even if the person you are co-signing for is a good money manager, you don’t know what the future holds for his or her finances. What if the person becomes unemployed or physically unable to work?

As one reader in Peachtree Corners, Georgia, wrote, “I have told more than one relative that while I can guarantee their willingness to pay, I cannot guarantee their health or employment.”

Despite all this, some of you will go ahead and co-sign. I know, because you’ve told me so. You relate stories of how you helped your adult child get his or her first apartment or car by co-signing.

OK. So many of you won’t say no. At least establish some guidelines should you consider co-signing, which you shouldn’t. (Just had to say that, again.)

Auto loans. Don’t be a passive co-signer. If you are going to co-sign, it should become your business to sit down with the person and look at his or her budget to make sure the monthly payments are affordable — to both of you.

A recent report by Experian Automotive found that the average amount financed for a new vehicle in the fourth quarter of 2015 was $29,551 and the average monthly payment was $493. The average price of a used car was $18,850 and the payment $359.

The average loan terms for new and used vehicles were 67 months and 63 months respectively, according to Experian. Twenty-nine percent of loans extended to 73 months to 84 months. With extended auto loans, the payments might be lower. But as a co-signer, you’re extending your liability for too long.

Don’t lend your good credit name to an auto loan longer than the once-typical 48 months.

Personal loans. Find out what the person is planning to use the money for. The loan could be a temporary fix to a chronic financial problem that will only lead to late or missed loan payments.

Student loans. Could the student commute and thus reduce the amount that needs to be borrowed, which in turn would limit your financial liability? And consider this: Your agreeing to co-sign might be encouraging students to attend a school that’s just not affordable for them.

Credit cards. If you are co-signing to help a young adult build credit, make sure the credit limit is super low. The way the credit scoring system works is that people just need to show they can use credit and pay it off on time. They don’t need to spend a lot.

I’ll leave you this last caution. In the CreditCards.com survey, 26 percent of participants said their relationship with the person they co-signed for ended up damaged.

Hate to be a nag. But the risk of co-signing is just far too great.