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Co-Sign a Loan? Never, Ever

Dear Mary: About ten years ago my daughter co-signed on an automobile loan for a friend. The “friend” skipped out on payments and left town, so they came after my daughter for payment. All these years later, she still has not paid anything on the loan. Is there a time limit for how long they can come after her to pay? Is there anything that she can do to get out from under this problem? Thanks. Jeanie H., North Carolina

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Dear Jeanie: I am not an attorney, so I cannot offer any kind of legal advice. That being said, my understanding is that in North Carolina a debt that is secured by a promissory note (like a car loan) does not have a statute of limitations (SOL) per se. Once the lender files suit and receives a judgment against the borrower (your daughter) for non-payment, the lender has ten years from that date to try and collect. Then the debt can be reported to the credit bureaus for up to seven years after it is “written off” as uncollectible, which is only slightly better than “bankruptcy” on the list of bad things on her credit report.

Your daughter should go to AnnualCreditReport.com to order all three of her credit reports, one each from Experian, EquiFax and TransUnion. She is entitled to one free report from each bureau, every 12 months. If a judgment has been filed against her, the reports will show those details including a date the judgment was filed.

This is a terrible tragedy and I am so sorry that she has gone through this ordeal.

Now, even though you didn’t ask, I’m going to give you, your daughter and everyone reading this my standard lecture on co-signing for a loan. Do not do it. Never, ever and I mean under any circumstance.

If anyone (child, parent, brother, sister, cousin, aunt, uncle, employer, employee, friend or foe) cannot secure a loan on his or her own, that means the bank sees this person as too risky. So why on earth would you, a non-professional person with limited resources, step up and agree to take on a level of risk that even a big bank would not? You shouldn’t. Never, ever, which I believe I just said, but I need to keep saying it.

Whenever you co-sign on a loan by adding your signature to the promissory note, you are entering into a legal contract promising the lender that if the borrower defaults, you will gladly pay the loan on his or her behalf—no matter how much it is or how long it takes.

If you really want to help and you believe in this person’s ability to repay a loan, wonderful. Do it. But instead of co-signing on a loan, you become the lender. You heard me. Just hand it over now and save yourself all that hassle later. What? You can’t afford to do that? Then you cannot afford to co-sign either.

So are we clear on this? Never, ever co-sign for a loan. Hear?

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  1. PJ says:

    My husband an I co-signed a student loan for a close friend of my daughters, (her parents could not). We were prepared to write it off if it wasn’t paid back, but we are happy to say that this girl has graduated with a nursing degree and is paying off her loans. I am very proud of her and we think of her as a daughter. We also have given her the lexture of “never co-sign a loan!” LOL

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  2. Deb says:

    Looks like the bad stories outweigh the good ones. My mother co-signed a small loan for me for furniture when I was 18; funny because my parents had lousy credit and mine was actually good, having purchased a small piece of jewelry from a local jeweler who was noted for helping people get started. I paid that off pronto and got a gas card, always paid off every month. But my age, at the time, was the stumbling block. Prior to 1972, you had to be 21 to get major credit. So I paid off the furniture loan fast. Fast forward 25 years and my son asked me to cosign for a used car. I got stuck for it, which I told him was his Christmas present. So when my daughter came to me 5 years later, saying, well, you signed for my brother, please help me now, I did, but for a much larger loan. I had the credit union put the car in my name. Sure enough, I got stuck, but at least I had the car, and a very bad relationship with my daughter for a very long time. Mary, you are right, there is much much more at stake here than money. I will NEVER EVER do it again!

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  3. Big Mary Fan says:

    Hi Mary,

    This also impacts how you pick a marriage partner.

    I did not personally do this (my mother gave me the same advice you did), but my girlfriend did. We’ve talked marriage, but I won’t do it knowing that she is now fully liable for a car that she co-signed for her adult daughter. She’s in her late 50s so paying off that debt could take her into retirement easily. She doesn’t make enough to pay off her daughter’s car outright.

    She thought her daughter was being responsible. Her employer made a comment about her poor credit. She called the car company and found out her daughter had stopped making timely payments or full payments. The daughter expects the mother to pay for the car now,since she can’t pay for rent, school and the car. T
    To make matters worse, my girlfriend had switched cars with her daughter two years ago, so that the daughter has the paid off car, while my girlfriend drives the much newer (2007) car. Now she complains about making car payments since discovering how much her credit has suffered.

    I told her to switch the cars back or take hers from her daughter, and sell it. (The company is willing to transfer the title in her name if she will pay off the balance.) Her daughter could then find other transportation that she could afford – like the bus. So far, my girlfriend doesn’t want to do that.

    Your column is so timely. I wish my girlfriend would have thought about that before signing to “help” her daughter.

    When she told me this, I told her I loved her, but I had serious reservations about marriage because she now has this debt over her.

    I’m not taking the chance on having my credit messed up because she is not able to make responsible choices financially.

    I love her, but I’ve read enough of your columns to know that fiscal prudence is essential for a happy, long and prosperous marriage.

    Reply
    • Guest says:

      Oh man this is such a sad story. Financial literacy can make otherwise really smart people make really dumb choices. Been there, done that and got the T-shirt. Fortunately for me I didn’t lose out on a wonderful marriage because of it.

      Reply
  4. Mom says:

    Mary, we co-signed on a note for our son to buy a car at our trusted, local bank. Our bank was later gobbled up by a conglomerate bank which took the note and our bank accounts with it. The first time we knew that our son had defaulted on his note was when the bank deducted the whole remaining note from our accounts — without notifying us of the default or their plans. The bank told us they had every right to do so — but without notifying us? (We had not moved, same phone number, etc.). Then — the kicker — they wouldn’t release the title to us since we had paid off the car; they said it had to be sent to our son — and did so!

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    • Guest says:

      Wow. Stunning story. Even when they’re dead wrong it is not easy for lowly consumers to go after big banks and win. Just more and more reasons to hate debt. I hate debt! I do … I even hate mortgage debt in a love-hate kind of way. It’s difficult to imagine ever owning a home outright without having a mortgage somewhere along the line.

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  5. kaetra says:

    I’m sure there are just about as many people out there who have had a positive co-signing experience as there are that have had a negative one. However, we all have to remember it’s always a risk and sometimes it’s a big risk. I personally would be extremely wary and avoid it unless circumstances were truly dire.

    For car loans I wanted to add this comment – My stepfather co-signed a loan for me when I was 18 years old for a used car and I made all the payments on time. However after the car was paid off, it didn’t occur to me to have the title changed to my name only. It also didn’t occur to me to change my registration address when I moved to Chicago. Well, long story short – I got a parking ticket. I never saw the ticket on my windscreen, and never once received a notice in the mail because the ticket kept going to my step-father’s house, addressed to him. He didn’t tell me about the notices because he assumed I was aware of the ticket and was blowing it off, which upset him. This hurt our relationship. As soon as I found out about the ticket I paid it and all the late fines, but I do regret how things turned out and wish I had been more responsible about changing the title and license registration to my name and new address as soon as possible.

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  6. Needless to say says:

    Sorry that you think this is a mistake, but my father co-signed for my first car when I was 19 and I paid it in full without any late payments.

    Reply
    • Guest says:

      Well he raised a good son/daughter … and yours is an exception to the rule. I don’t know how long ago this was, but I would guess it’s been a while? Even so … I hold firm: Don’t do it. Never. Ever. Your Dad was lucky. And please do not take that personally. Statistically, he was very lucky to have made a bet on a good guy.

      Reply
  7. M.E. says:

    i did and more than once. I am near retirement age and paying on all of them to a debt collector. Needless to say, 3/4 of my payment goes to interest. I will be paying until i die and then they will try to collect from the signer, i guess. They are all student loans. I would happily pay if the money actually paid down the balance but i have already paid the initial amount and here, years later, I am still paying. Hindsight – if I had only known.

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  8. B. Adams says:

    I did with my daughter. I’ve had a couple phone calls. I also made a couple. However I knew I could pay it off if necessary.

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  9. itriedthemall says:

    I did co-sign a loan with a friend and co-worker. This was about 30 years ago and I was very nervous about doing it. I think it was for around $2000 (a debt consolidation loan.) Really risky for me and I knew I might end up with the bill. I was especially nervous when this friend “thanked” me by ordering an hour ride in a limo and arranged for us to have some extra time off at lunch!

    The good news is that she valued our friendship enough (I was counting on that) that she paid the debt off ahead of time. If she’d somehow managed a conventional loan for this, I’m afraid she would have blown it off because “they could afford to lose her money.”

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      • itriedthemall says:

        I realize that I am very fortunate. I have never since been willing to co-sign. Any personal loans are (in my mind) considered a gift. If I get the money back – great! If not – it is now a gift.

  10. Carol C says:

    Hi Mary,
    I did cosign a loan for my daughter for furniture. I believe the furniture came to $2400 and they would only give her $2000. I signed with the knowledge that if she did not pay I would be giving her $2400 and that was ok with me. Not only did she pay on time but paid it in 6 months. I agree never sign unless you are willing to pay the bill. I only did it because I was able to pay if she was not able to pay it. I hold this princpal to lending too. If I cannot afford to live without it I will not lend. I also will not lend to someone that it would cause me to be upset if they did not pay it back.

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