Should I Cosign For a Loan?

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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:

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

Debt Is Not Forever

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I have talked to hundreds of people about the topic of debt and their plans to pay it off. The one thing that I have found is common among most of them (probably 95%) is the belief that they will be in debt until they die, and all they can do for now is manage it.

I cringe every time I hear that type of thinking, because it implies that you are fine with living as a slave to your creditors with no hope of escape!

Debt Is Not Forever

My wife and I have been greatly impacted by our debt. I know what it’s like to feel like this is a normal part of life, but it isn’t. There are many reasons why I hate the attitude that our lives should be funded by debt and we shouldn’t work to get out of it, but here are three that really hit home for me.

Debt is not Forever

The Purpose Of Debt

The main purpose of debt is generally to buy something that you can afford, but don’t have the money at the moment. For example, let’s say that you have to buy groceries on Monday but you don’t get paid until Friday. A “good” (obviously, this is somewhat subjective) use of debt would be to buy your normal groceries on Monday using a credit card, and then paying that amount back on Friday when you get paid. Of course, there are other ways to handle this (moving money from savings would be ideal), but you get my point.

Another responsible reason that people go into debt is for an investment. If you are fairly certain that the rate of return on an investment will be greater than the rate of borrowing, then taking on debt in order to make or increase an investment may make sense.

The idea of investment doesn’t just mean stocks and bonds, but it also can mean an education, healthcare, or anything else where the return is greater than the cost of the debt.

Because of the short-term and strategic nature of debt, it is inconsistent with sound financial living to stay in debt for life, being satisfied with losing money month after month. Therefore, debt is not forever!

[Learn 4 benefits of using credit cards!]

The Bondage Of Debt

I’ve written before about the terrible bondage/slavery associated with debt. I am not able to do most things that I want to because of the cloud of debt which hangs over my head. Because so much of our paycheck goes toward debt repayment, we can’t just fly down to visit my wife’s parents whenever we want, for instance.

We would love to have a 2nd car so that my wife could take care of things and/or visit people during the day, but our master (debt) won’t let us. The same is true about our giving to church, investing, and even building up our business – we want to be free to pursue our ambitions/convictions in these areas, but then ‘Massa Debt’ tells us NO!

Because being in debt can, in many ways, be compared to being imprisoned or enslaved, it is unwise to take a cavalier approach to borrowing and owing money. To go through life never knowing the joy of financial freedom is a fate that many people accept, but you don’t have to be one of them! Tell yourself that debt is not forever!

The Testimony Of Debt

Even though a large amount of Americans have debt and many accept it as a normal, unavoidable part of life, they still look down on someone who has it. A person with massive debt often appears to be irresponsible, lazy, and undisciplined.

Oftentimes, it isn’t even a deliberate association, but more of a deep-rooted subconscious thought. Having debt – especially for a long period of time – makes it seem as though you are immature, and unable to fight the impulse to spend money that you don’t have.

Because of this, people with long-term (or excessive when compared to income) debt are turned down for financial opportunities, employment, and even places to live. You don’t want to live your life with that stigma hanging over your head. That’s why we have to live life as if debt is not forever!

What About You?

  1. What is your attitude concerning debt? Can you honestly say that debt is not forever?
  2. Are you prepared to live the rest of your life in debt or are you fighting to pay it off?
  3. If you have paid off your debt, what were some of the things you did to change your mindset?

This post is part of the debt is not forever movement started by Jackie at the Debt Myth. She is also holding a giveaway through the end of the month, so make sure you head over and tell her why you want to get out of debt, for a chance to win!

Four Student Loan Debt Options You May Not Have Considered

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In our current society, it has unfortunately become the norm to graduate from college with a large amount of student loan debt. Then the student struggles to find employment, and if they are lucky enough to do so, the salary is way below the expectation of the degree they earned.

Student Loan Debt

Thankfully, there are a number of options out there to help alleviate this debt that goes beyond the six month grace period after a student graduates. Some people may be qualified without realizing it, since some are pretty new, and haven’t considered getting help with the burden.

The important thing to realize is that this isn’t easy or free. There are extremely specific qualifications that need to be met in many cases, such as: debt to income ratio, specific time frames, length of employment, and consistent payment of existing loans. Also, only certain loans are eligible for these options.

Student Loan Debt Repayment Help and Forgiveness Options

1. Becoming a teacher in a low-income area. If you have a Stafford or Perkins loan, some or all of your debt can be forgiven if you work in a designated school (the government provides a directory of schools that qualify) as a teacher for five complete and consecutive years.

2. Join the military. Each branch has their own student loan debt forgiveness information, so check with the specific branch of the military for options.

3. A Public Service or non-profit job. This Public Service Loan Forgiveness option only applies to a Direct loan. For this loan you must have 120 qualifying payments (keep in mind that these payments will take you at least 10 years) while working full-time in these areas. Since this option came about in 2007, you can apply for this in 2017. “You must be working for a qualified public service organization at the time you submit the application for forgiveness and at the time the remaining balance on your loan is forgiven.”

4. Pay As You Earn. This program caps payments at 10% of discretionary income and forgives remaining loans after 20 years. For this plan, you must be a new borrower as of 2007, and only certain Federal loans apply. You must have at least a partial financial hardship and your payment amount may increase or decrease each year based on your income and family size.

Other Options for Student Loan Debt

These are a few of the most common plans out there, but please research through the government’s website, your loan program, even your employer to see if more options are available to you.

This is an important thing to do, especially if your debt is taking up more than 10% of your income.

 

 Have you applied for, or benefited from any student loan debt forgiveness or help? Do you know of any other student loan debt options?

 

Photo by FreeDigitalPhotos.net

How to Invest Money and Combat Debt

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[The following is a featured post discussing the idea of investing a small amount of money in order to pay off debt. This is something that I have done with mixed results so far.]

In days gone by, it was commonly believed that the specter of debt could only be overcome by reducing expenditure and committing to a frugal lifestyle. While this remains solid advice, however, it is not necessarily the most productive method in an age of technological advancement and advanced money making opportunities.

Although it may sound a little unorthodox, the prevailing contemporary theory requires individuals to invest capital in pursuit of greater returns. This money can then be used to repay debts more effectively, without forcing households to struggle against a back-drop of austerity and long-term uncertainty.

Debt Investing

How to Speculate and Accumulate: 3 Ways to Spend More and Generate Additional Income

With this in mind, how exactly can modern-day speculation inspire you to boost your income and stave off debt? Consider the following:

Embrace the Financial Markets

While access to the open financial markets was once exclusive to professional traders and large commercial institutions, the development of sophisticated online trading platforms and educational resources have removed many of the pre-existing barriers to entry. As a result of this, numerous markets are now within reach of independent traders with minimal dollars.

This has exposed everyday citizens to a diverse range of financial products and derivatives, from trading forex and currencies to exchanging carbon credits. While you will needs patience and knowledge to succeed, there is ample opportunity to build wealth through this method.

Understand how to Create a Stream of Passive Income

Passive income is a term used to describe capital can be generated without the completion of a direct action or the sale of a commodity. It allows you to speculate and accrue wealth that is entirely separate to what you earn through traditional working methods, which in turn can be used to clear a significant amount of your total debt.

There are several options of this type to suit alternative risk appetites, with the latest high yield checking accounts providing a low-risk avenue for growth and real estate investments available to those with more income and a desire to achieve greater returns.

Do not Underestimate the Rewards of Hard-work

While it may sound old-fashioned and overly simplistic, hard work remains one of the most effective methods of boosting your income and combating personal debt. This does not necessarily mean that you have to work for 12 hours a day in a number of physically demanding jobs, however, as those of you with a viable industry skill can use it to work from home and freelance in your spare time.

Website developers, content writers and software developers remain in constant demand in the current economy, and this has created opportunity for proactive individuals to market themselves as an independent contractor.

As a general rule, speculating to accumulate does require a certain degree of disposable income in order to generate any sort of return. This can be minimal, however, so as long as you are willing to commit this sum in the pursuit of reducing your debt then you can achieve outstanding results over time.

This Is Why I Hate Debt and Sher’s Blog Medley #2

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It’s my fault. I am the one who relied on credit in the first place, therefore giving my lenders the power to determine my “worthiness”.

The other day, I got a letter in the mail saying that one of my creditors lowered my credit limit. They didn’t do it because I have been paying late (I have never ONCE in my adult life had a negative item on my credit report), and it’s not because something changed drastically regarding my credit.

They decided that I have too many cards that are close to the limit, so their solution is to lower my limit to right above what I owe them 😯 .

As a result, my credit score will be lowered.

I am upset about it, but as I stated in the first place, I am the one that put myself in this position. That’s why we are fighting so hard now.

The hard part about it is the emotional side. When I first opened the letter I was fuming, and Khaleef had to calm me down. I hate feeling de-valued. I hate feeling unworthy. Most of all, I hate giving someone/something else the ability to make me feel like that!

Debt Slave

When it comes down to it, I am striving to get to the point where my credit-worthiness will be the least of my concerns. Right now, it isn’t a big deal because we aren’t relying on a score for anything; but in the back of my mind is the idea that I could need a good score for some reason, and I want to make sure it is there.

I have considered calling the company and venting my frustrations, but the fact is they don’t OWE me anything. I am the one that became a slave to them, and now I am bound by what they say.

If you’ve ever let your debt affect you on a mental or emotional level like this, it’s time for us to liberate ourselves. Let’s work hard, fight hard, sacrifice, and stay committed so we can be free.

Now unto the great posts that hit the right notes throughout the past week!

Blog Medley

Lisha from UpGusto explains how our beliefs control our circumstances. This is a really motivating post that will get you up and moving on some of the goals you haven’t been actively pursuing.

Barbara gives us some tools and insights so you can decide if working part-time is best for your situation. A lot of my friends have small children, and this article hits many of the points they’ve considered.

Travis from Enemy of Debt writes about combining finances successfully after getting some flack feedback because he checked with his wife before a purchase. I always appreciate what Travis shares about marriage and finances since he seriously rocks in both areas!

H.D. Carver from Your Finances Simplified addresses the challenges Millenials face in saving for retirement. Social Security may not exist by the time they reach retirement age, and it is important to put a plan in place.

Eva from Teens Got Cents navigates the differences between a credit union and a bank. I agree with her that credit unions do offer benefits you won’t get at a larger bank.

 

I hope you enjoy the posts and the rest of your week 🙂 !