borrowing Archives - Faithful with a Few

Should I Cosign For a Loan?

A friend or family member needs a loan, but their credit score is not high enough (due to terrible or no credit history, or massive credit card debt), or they don’t have a large enough down payment or some other reason. So they come to you and ask you to be a cosigner on their loan.

What Does It Mean To Be A Cosigner?

To be a “cosigner”, simply means that you agree to assume the responsibility of another person’s debt if they are unable to pay it. For example, if you are a cosigner on your brother’s $20k car loan, you have now agreed to pay the bank back that $20k (or whatever is left at the time of default) if your brother is not able to pay it back.

Many people will face this dilemma at one point in their lives. In fact, many people will actually cosign for loans even when they do not feel comfortable doing it. It is usually due to not wanting to be the bad guy, or is sometimes a genuine attempt to help someone. This is often viewed as a way to help out someone in need – such as a responsible, young person who just needs a chance to display or prove their credit worthiness; or a way to assist your child at the beginning of their “independent life”. But is this a wise thing to do?

What Does The Bible Say About Being A Cosigner?

Proverbs 17:18 tells us that,

A man lacking in sense pledges and becomes guarantor in the presence of his neighbor.

Right away we see that the bible describes one who becomes a cosigner on a loan as “senseless“! We can see that it is not a wise thing to make a pledge based on someone else’s ability to pay back a loan.

We also see such council in Proverbs 22:26,

Do not be among those who give pledges, among those who become guarantors for debts.

Not only are we instructed not to cosign for a loan, but we are also shown some of the dangers of doing so… Proverbs 11:15 tells us that:

He who is a guarantor for a stranger will surely suffer for it, but he who hates being a guarantor is secure.

So, we are actually told that we will “surely suffer” if we decide to pledge ourselves for another person’s debt; and that one way to stay secure is to “hate being a guarantor“! Those are very strong words to describe what has become such a common practice today.

Also in Proverbs 20:16 we find these words,

Take his garment when he becomes surety for a stranger; and for foreigners, hold him in pledge.

It was common to pledge a garment as security for a loan, but – according to Exodus 22:26-27 and Deuteronomy 24:10-13 – that garment had to be returned by sundown.

The idea here is that one who is foolish enough to pledge himself for the debt of a stranger will most likely never be paid back; so the one making the loan should demand the cosigner’s garment as security for the loan.

This shows the senseless and unpredictable nature of pledging your possessions or your life based on another person’s ability or willingness to pay their debts.

Also, one question that must be asked is, “Why does this person need a cosigner?”. The most basic reason is that their bank does not believe that they will pay back the loan.

They use their own experience, a few calculations and the potential borrower’s history with loans (usually expressed on their credit report) to make their decision regarding the loan.

When they request a cosigner they are basically saying, “We don’t trust this person to be able to pay us back, but if YOU are willing to take all the risk then we will give him the money!

What Should You Do If You Have Already Become A Cosigner?

Proverbs 6:1-5 gives us additional instruction. This time however, the instruction is given to one who has already pledged himself on behalf of someone else:

My son, if you have become surety for your neighbor, have given a pledge for a stranger

If you have been snared with the words of your mouth, have been caught with the words of your mouth

Do this then, my son, and deliver yourself; Since you have come into the hand of your neighbor; go, humble yourself, and importune your neighbor.

Give no sleep to your eyes, nor slumber to your eyelids;

Deliver yourself like a gazelle from the hunter’s hand and like a bird from the hand of the fowler.

As we can see from the strong language in this passage, it is a serious matter to pledge yourself on behalf of another. This is because you have essentially given up control of something that God has given to you as a stewardship, and have become “snared” by your pledge.

This situation is so serious that you must do everything that you can to free yourself from this arrangement and gain back control of your God-given resources. Look at how strong the language is here; you are told to “deliver yourself” and not to sleep until you have freed yourself (see Proverbs 22:7)! You are to act as a gazelle or bird that is about to lose their life to the hunter!

So, if you are in this situation, it should be your highest priority to free yourself from this before you “surely suffer” (Proverbs 11:15; cf. Genesis 43:9, Genesis 44:32-33).

What can you do instead if you want to help?

If you still want to help while obeying God’s word regarding cosigning, there are a few things that you still can do.

Give Them An Interest-Free Loan:

If you know the person is in need, this is one way to help them that will honor God. Proverbs 28:8 assures us that,

He who increases his wealth by interest and usury gathers it for him who is gracious to the poor.

According to Deuteronomy 23:19-20, it was against the law for an Israelite to charge interest to fellow Jews (of course, loans were only to be requested in times of extreme need and poverty – not to fund frivolous, sinful spending like we see today), but many violated this command. As we see here, giving someone in need a loan and not charging interest is a way that you can assist the one in need and please God.

Give them the money that they need.

Proverbs 19:17 tells us that,

One who is gracious to a poor man lends to the Lord, and He will repay him for his good deed.

If you are able, giving your money to one in need – and only expecting repayment from the Lord – is another way to assist a brother in need and honor God with your finances.

Final Thoughts:

As mentioned earlier, since the bible teaches that debt is slavery (Proverbs 22:7), borrowing should only be done when one has a basic need that cannot be met by their income. It was usually a short-term loan, and the Israelites were commanded to forgive all debt every seven years (see Deuteronomy 15:1-15).

Much of the borrowing that we see today represents a person’s desire to live above their means, and I do not believe that type of borrowing (or giving) is what God is speaking of. Hopefully, I will have a chance to address this in much detail in a future article.

So overall we see that God is completely against the idea of one becoming a cosigner for the debt of another, even if we are really seeking to be a blessing to someone in need. However, the bible does teach us other ways in which we can assist others.

I mentioned stewardship earlier. I realize that this may not be a term or concept that is familiar to many modern readers, but this is a concept that God expects us all to understand. A steward is one who manages another person’s property, finances or other affairs. Here are several articles that do a good job of describing the concept of stewardship:

http://onemoneydesign.com/blog/2010/01/10/what-the-bible-says-about-money-financial-stewardship/
http://www.biblemoneymatters.com/2010/04/financial-stewardship-the-forgotten-component.html

I would love to hear your thoughts on cosigning – even better would be your experiences with it. If you have any questions on this or other concepts, please leave your comment below.

photo credit: 4PIZON

A Few Tips To Better Understanding Loans

By // by guest

[The following is a guest post explaining the various terms used concerning loans, so that you can make a more informed decision when borrowing money.]

Deciding that you need to apply for a loan of any sort can come at a traumatic and hard time for anyone. And yet once you have decided to take that step you are confronted with a wall of buzz words and catch phrases that simply don’t mean anything to you.

Follow this plain speaking guide below to understand for certain what type of loan you might require.

Unsecured Vs Secured

Loans fall into two categories here and are always one or the other. A secured loan is one that is secured against something that you already own. For example you might take out a loan that is secured on your car. This means that if you default on payments the loan company may seek to claim ownership of your vehicle instead to make up for the missed payments.

An unsecured loan is one that is not tied to any assets, these tend to be short term and for smaller amounts than secured loans.

Short Term Vs Long Term

Again loans are always one of these two categories, either short or long term. This are relatively self explanatory expressions with short term loans being repaid over a much shorter time frame and long term loans being held over a longer time. Short term loans tend to be for smaller amounts such as an overstretched month or small purchase.

Long term loans tend to be larger and for one of purchases of a substantial nature, the most common of course being a mortgage which is a long term loan to buy a house.

Guarantor Loans

Traditionally those people with bad credit or low wages have not been able to take out loans. However, it is now possible for these (and others) to get a guarantor loan which is a loan that another person guarantees will get paid.

In essence this means that if you default on the loan then they become liable for the repayment.

Open Ended Vs Close Ended

A closed end loan is simply one that as you pay back the debt decreases but it gives you no available credit for re-borrowing. An open ended loan is one that as you pay back money you gain credit which allows you to re-borrow again and again up to the total you originally borrowed.

This means that your debt can go both up and down.

So now you’ve got the basics, hopefully you feel a bit more confident about finding out your next step.

photo credit: freedigitalphotos.net

A Resource For Financial Hardships

By // by guest

photo by chmeredith

The following is a sponsored guest post on behalf of PayPlan:

In today’s testing economic times, many of us have found that often there are too many days in the month and not enough in the wage packet. However, what happens when money worries become more serious, and you have a huge debt problem? Is there anywhere you can go for help and advice?

The answer is a resounding yes. There are many places which offer both debt advice and debt management services, which are familiar with the different types of credit in the market. Some places offer their services for free and some charge. Two examples of companies offering these services are the Citizens Advice Bureau and PayPlan – both are free services but fundamentally very different.

It would be reasonable to assume that in times of financial difficulty it would be prudent to opt for the cheapest option available and not incur further debts. Many services which offer free advice are of great use and are there to help individuals find a suitable solution.

The Citizens Advice Bureau (CAB) is an organisation which has been providing debt advice, amongst other services for many years. However, the disadvantage of organisations such as CAB is that they often are very busy and individuals may have to travel some distance to their local office. The other disadvantage is that they aren’t always able to offer sufficient time needed on each individual case due to the overwhelming demand.

Payplan brings together the best of both the free and chargeable services. The credit industry is keen to work with customers to find a mutually agreeable solution in cases of hardship. Therefore, there are now debt management companies in the market who are able to offer in-depth debt assessment and management plans which are free to the customer, as they are funded by donations from various sources.

There are of course many companies in the market who offer debt management services but charge a set-up fee and ongoing management costs. Whilst in most cases these costs are reasonable and understandable (debt negotiation involves a lot of administrative work), the services on offer are not any different to the services offered by a free provider such as Payplan.

Citizens Advice Bureau, Debt Line and Payplan are leaders in consumer debt advice but of course there are many companies who offer similar services. Anyone considering a course of action should research all of the companies available before deciding on the best option for their individual
circumstances.

Is It Ever Ok to Take Out a Loan?

By // by Khaleef Crumbley

Being a personal finance writer, an aspiring financial planner, and an economist by training, you may believe that I’m completely against debt. For the most part you would be correct! However, I do recognize that there are times when the wisest thing to do is to borrow money.

Keep in mind, there aren’t that many circumstances that will be improved by borrowing. However, I can’t say that it doesn’t exist. Here are two prime cases where borrowing money may be best:

Not prepared for an emergency:

Some people are in horrible financial situations and need to borrow money in order to avoid a financial disaster! Consider someone who doesn’t have an emergency fund, or even a cushion in their bank account. When an emergency arises, they may be forced to borrow money to stay afloat. If their response is to go looking for emergency loans, you really can’t blame them.

We aren’t talking about someone who wants to borrow money to buy an iPad, but someone who is facing a true financial emergency!

Obviously, the goal should be to arrange your finances so you can handle most reasonable emergencies that come your way. But, many of us have put ourselves in a position where a loan is the only way out. At least until we can straighten out our finances!

There are actually some financial writers who will recommend that you don’t have an emergency fund, and instead depend completely on credit. The problem with that advice is that many people do not have great (or even good) credit scores. So they are stuck applying for those bad credit personal loans, or trying to find a way to discover loans with no credit check. If this is your emergency plan, I would suggest saving up at least 9 months of living expenses, instead!

But those people who are living from paycheck to paycheck and then get hit with a financial emergency, are usually left with no other option but to borrow money – and usually not at favorable rates! Although, finding ways to increase your income is an often overlooked option!

Refinancing/Consolidating current debt:

Also, if you are trying to get on your feet financially, it may make sense for you to consolidate your debt using a personal loan (especially if it is unsecured). If you are able to get a lower interest rate, then borrowing money to consolidate your debt may be the best thing you can do! However, this isn’t to be taken lightly – especially if we are talking about credit cards!

Too many people will use a balance transfer option or even a personal loan to consolidate credit card debt, and then go back out within a year and charge up those same credit cards! Before thinking that refinancing or consolidating your debt is the answer, make sure that you have corrected whatever warped thinking, or unhealthy circumstances that lead to your current condition!

So, basically I believe that if you are in dire straights and an emergency arises, then you may have to borrow money. Also, if you are in a position where you can save money on interest payments by consolidating or refinancing your debt, then borrowing may be a good option for you as well.

In spite of all of this, borrowing money still puts you in the position of a servant to the one who has lent to you (Proverbs 22:7)!

Reader Questions:

Besides buying assets, what are some situations where you feel it’s ok to borrow?
Have you ever had to take out a personal loan?
Do you believe that a person should just use credit as a replacement to an emergency fund?

photo by Omar Omar

Trying to Reduce Expenses? Sweat the Big Stuff! – Housing Costs

By // by Khaleef Crumbley

According to the latest Consumer Expenditure Survey from the Bureau of Labor Statistics, housing represents 33.9% of overall consumer spending! This means that housing is by far the most expensive item in most budgets.

This means that a reduction in our housing costs should have a great impact on our overall expenses. Unfortunately, this can be one of the most difficult categories to make immediate changes. There are, however, a few ways in which we can cut our housing expenses. First we’ll look at cost-saving methods for homeowners, and then we’ll turn our attention to renters.

Mortgages:

Downsize & buy a smaller home – If your housing costs are too high, selling your home is one of the first things you should consider. If you are able to sell your home and completely pay off the mortgage, this may be a great option for you. If you are facing financial disaster, learn how to sell your house quickly!

This will probably work best for you if you owe far less then the value of your home and can handle accepting a lower offer than what you feel it’s truly worth – due to the currently depressed market. But this will also mean that you will be able to buy another home for far less than what you paid a few years ago.

Combine that with maybe reducing the overall square footage or number of rooms, and your savings should be substantial. Don’t forget about the various financial incentives for homeowners, such as the window tax credit.

Refinance – If you qualify for a lower interest rate on your mortgage, you should consider this option. There a lot of variables to consider when refinancing – such as closing costs, the length of both your current and new loans, the interest rates, points, etc – so you must do your homework before just jumping right in.

However, this is still a popular choice among those seeking to lower their housing costs. Once you get older and your situation changes, you may be interested in a reverse mortgage!

Stop paying PMI – Many homeowners are paying hundreds of dollars each month because they were not able to come up with a 20% down-payment. For most mortgages that were taken out for more than 80% of the value of the property, the bank requires the homeowner to pay Private Mortgage Insurance.

If you currently owe less than 80% of the value of your home and are still paying PMI, contact your mortgage company immediately for instant savings. Also, if you have enough money in savings (“enough” is relative), it may make sense to pay down your mortgage in order to stop paying these fees.

Sell your home & rent – This option will reduce your housing costs more than anything that we’ve listed. Besides the fact that your rent will most likely be less than your mortgage payments, you will have significant savings in other areas such as – taxes, interest, maintenance, insurance, and even utilities!

Rent:

Downsize & move into a less expensive place – When you are a renter you have less options to reduce your housing costs than a homeowner. However, you can choose to move into a less expensive place. By changing the size, location or even the number of bedrooms, you can find substantial savings.

Find a roommate – If you don’t mind sharing a bathroom or kitchen, a roommate is a great way to reduce expenses. You can share the costs of groceries, utilities and cleaning supplies in addition to the rent.

Negotiate and/or Barter with the landlord – You may be able to reduce your rent by bartering with your landlord. Maybe you are handy and can handle the maintenance of your unit, or you can trade your computer knowledge for a discount in rent. If your landlord has multiple units, maybe you can handle his accounting tasks. You may be able to trade cooking, cleaning or other housekeeping chores for a lower rent.

One thing to remember is that when you move into a smaller house or apartment, the cost of your utilities should decrease as well.

What are some of the ways that you have been able to reduce your rent? Have you ever bartered with your landlord? Have any of you sold your home and decided to rent? What are some other ways to save on housing costs?

photo credit: The-Lane-Team

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