Is it a Good Idea to Co-sign or Loan Money?

If you look back through the history books, there have been many countries that have become so indebted and on the brink of financial ruin, that a lender of last resort was needed to come in and bail out that country. Throughout history, we have played that role and I would suggest currently other countries are playing that role to a certain degree for us.

That can also happen on an individual level as well. A person can become so indebted or have such poor credit that they require a personal loan or someone to co-sign for them.

So what should you consider when it comes to co-signing or loaning money to someone?

Co-signing is the worst of all situations when it comes to debt because you are taking on the responsibility of the debt that you have no control over. If you are going to co-sign for someone, remember that it is the same as taking out the debt yourself. How are you going to know for sure that it is being paid back? If it doesn’t get paid back, then your credit is harmed and you will be on the hook for the debt.
I always like to look at the book of Proverbs. The book of wisdom to me is a compilation of wise bits of information that, if implemented, keep us out of harm’s way. Concerning co-signing, King Solomon writes in verse 26 of the 22nd chapter:

(26) Don’t agree to guarantee another person’s debt or put up security for someone else.

It is an important piece of wisdom because the majority of co-signing agreements don’t work out.

With all good intentions, people will lend money to help another out. Now it might be that you feel God leading you to help someone out and lend them money. If you are going to lend money to another, go into the agreement with one thing in mind. If they don’t pay it back, you are fine with considering it a gift.

In most situations, the person borrowing the money ends up in a bigger mess, doesn’t pay the money back, and then a relationship is destroyed. It is just not worth it.

Most importantly where you are co-signing or loaning money to or for another, just know the risk. Anyone that comes to you for either arrangement does so with all good intentions. When either a co-signing deal is consummated or money is given on a personal loan, both parties feel real good about everything working out.

You have to consider the risk. People get themselves in over their head and cannot get money the conventional way. For most people severely in debt, the solution is to create more debt. Thus, as a co-signer or a lender to someone, you become the lender of last resort and assume huge amounts of risk.

Once again, only go forward with either arrangement if you are fine with picking up the tab.

Having said all of that, I was having a conversation with Jeff before we went on air. What about the people who are good for it? What about the people who are good for their word?

There are those good people out there and I also believe that there will be people that God leads you to help. As we always talk about on Prudent Money, the best rule of thumb when it comes to making decisions is simply this:
First, know the risk of the decision.
Second, pray that God will give you peace about saying either yes or no.