The Dangers of Co-Signing Loans for Family Members
As Consumer Proposal and Bankruptcy Trustees in the Greater Toronto Area, we routinely hear heart breaking stories of people who have ended up with huge debts as a result of co-signing loans for family members.
Perhaps the most insidious part of co-signing loans, is the fact that family members are being put at risk to protect a bank/lender’s investment. Not only is a co-signer financially responsible for the debt – when the payments are missed, some agreements require the co-signer to immediately repay the entire loan.
If the banks/lenders (who are experts at judging the likelihood a debt will be repaid) think someone will not pay the loan – betting against them by co-signing, is a losing game. Whatever happens, they are the winners.
Don’t Do It Grandma!
So, what is Grandma to do when her 22 year old granddaughter asks her to co-sign a loan on a $26,000 new car?
Say “No”.
Or, if you are uncomfortable with a simple no, try a more gentle approach: “I love you _____, but I promised your Grandfather I would never co-sign a loan for anyone, even you.” Note: It is ok to lie to your grandchildren if it is to protect them and yourself.
Be Firm Mom and Dad!
If the 22 year old approaches her Dad or Mom for the co-signature, they can take a more direct approach with comments like:
- Are you nuts?
- You are 22 years old – what do you need a $26,000 new car for?
- Save up your money, and buy a used car.
- I will help you find a good used car – but I won’t pay for it, or co-sign a loan for it.
Don’t Be Played by Guilt!
There is nothing to feel guilty about if you refuse to co-sign a loan for a family member. By refusing, you are helping them to live within their means.
Just as you would stop a child from putting their hand on a hot stove burner – teaching a family member to stay out of debt and save for their purchases – is one of the best life lessons you will ever share.
