Over the years I have had well-meaning people express an interest in co-signing a loan for a friend or loved one. They saw a need and knew they could help. Though their intentions were good, is it a good idea?
This post will look at what the Bible has to say about co-signing a loan, whether it still applies today, how it applies to your children; and if you still want to move forward, important steps to take. I hope this post will stir your thinking about this practical issue.
What Is Co-signing?
When someone applies for a loan, the lender reviews their financial situation and determines whether they are able to repay the loan (called underwriting). If the lender doesn’t believe the applicant can repay it, the lender may allow the applicant to have someone else added as a co-signer to the loan.
A co-signer will legally agree to pay off the loan if the applicant cannot. The lender will send the application back through underwriting using the combined finances of both the applicant and co-signer. As the co-signer usually is in better financial shape, that may be enough for the lender to offer the loan.
What the Bible Says
The idea of co-signing is not new, and was around in Biblical times (though they called it something different). Here are three passages that discuss co-signing:
Proverbs 11:15 “Whoever puts up security for a stranger will surely suffer harm, but he who hates striking hands in pledge is secure.”
Proverbs 22:26-27 “Be not one of those who give pledges, who put up security for debts. If you have nothing with which to pay, why should your bed be taken from under you?”
Proverbs 17:18 “One who lacks sense gives a pledge and puts up security in the presence of his neighbor.”
The Bible is pretty clear that co-signing a loan is not a good idea.
To further drive this point home, Proverbs 6:1-5 says:
“My son, if you have put up security for your neighbor, have given your pledge for a stranger, if you are snared in the words of your mouth, caught in the words of your mouth, then do this, my son, and save yourself, for you have come into the hand of your neighbor: go, hasten, and plead urgently with your neighbor. Give your eyes no sleep and your eyelids no slumber; save yourself like a gazelle from the hand of the hunter, like a bird from the hand of the fowler.”
If you have co-signed a loan, you need to do everything you can – including not sleeping – until you have gotten out of your obligation.
What Is the Issue?
The Bible is very clear in its warning about co-signing. Here are three ways it can impact you:
- Puts You At RiskWhen you co-sign a loan, you are making yourself responsible to pay off the loan if your friend/child does not pay back the loan. If they don’t have the money, then you will pay the loan off, potentially jeopardizing your finances. I have seen various statistics on this, but anywhere from 40-50% of all cosigners end up paying some or all of the loan.
- You Lose Your FreedomProverbs 22:7 says “The rich rules over the poor, and the borrower is the slave of the lender.” Your friend/child could not qualify for the loan due to their finances. By co-signing you are stepping into a challenging financial situation, and guaranteeing that you will repay the debt. By taking on someone else’s debt, you become enslaved to their debt situation. You can read more about what the Bible has to say about debt in this post.
- It Can Damage RelationshipsIt has been said, if you don’t want to hear from someone, lend them money. Loaning money (or co-signing a loan) to a friend or loved one, doesn’t normally improve the relationship.
The bottom line is that co-signing is not a good idea.
But What About My Child?
Though immediate family is not mentioned in the passages listed above, it seems clear that co-signing a loan for anyone is unwise. However, if you have a minor child or a minor child transitioning to adulthood, there may be a time when this is necessary.
Our financial system can be difficult to get started. Even if you diligently worked on establishing credit for your child, few lenders will let them open a credit card, take out a student loan etc when they have no/minimal income.
As a parent, you may be asked to help. You will need to determine how you will handle this, as this is an important stewardship decision.
If you decide to co-sign a loan for your child, here are a few points to consider:
1. Consider their character
Do they have the ability and wherewithal to repay the loan, or do they consistently struggle with financial discipline? Is this going to be a handout or a hand up?
2. Relationships are more important than money
When money is viewed as less important than a relationship, then you are willing to lose the money to keep the relationship. When you co-sign a loan, you are committing to paying it back if your child will not. Will this impact your relationship negatively? If so, I would be hesitant to do it.
3. Prepare and expect to pay off the loan
Despite the best intention of your child, plan on paying it off. Set aside the money, because the risk is reasonable that they won’t pay it off.
4. Don’t make it a habit
If you are going to co-sign a loan for your child, do it once, don’t turn it into a habit. Everyone has to start somewhere. But co-signing multiple loans or using the proceeds for unwise purchases does not help your child learn to be responsible.
5. Will it grow their faith?
No parent wants to see their child struggle. However, often times our faith grows the most in the midst of struggles. Balancing this can be difficult, but a point worth weighing as you make decisions.
As we all have to answer to the Lord for our own stewardship decisions, you need to decide how you will handle co-signing.
If someone asks you to co-sign, you can use it as a teachable moment that may help them grow in their stewardship responsibility. Perhaps you can provide wise counsel to encourage the person to save towards their goal, reconsider their spending or improve their credit before they move forward. Or you may feel led to give money rather than co-sign, to limit your risk and preserve the relationship.
Though co-signing a loan may seem simple, it may be counterproductive in a person’s stewardship journey.
The Bible is very clear about the risks of co-signing a loan. If you decide to ignore it, beware of the unintended consequences.
Points To Consider
- There is much wisdom in not co-signing a loan
- The person asking you to co-sign their loan may struggle if you say no. But it can lead to greater faith in God as He will provide for them in another way
- Relationships are more important than money. Try your best to preserve the relationship