Alternatives To Co-Signing

You’ve probably figured out that I am not a big fan of cosigning on loans – too much risk and no benefits. But we all want to help those we care about, so what else can we do? Here are a few ideas:

  • Help with a down payment: If you’re being asked to co-sign a mortgage or car loan, perhaps just helping with a down payment is enough, assuming you have the cash available. That could help them qualify for the loan on their own, with no need for you to sign as well. You can do this as a gift (make sure to understand the IRS rules on gifts) or set up a private loan agreement where you will eventually be paid back.
  • Lend the money directly: If you can do it, you can act as the bank and set up a private loan agreement with the borrower and let them use the funds to make the purchase. It’s important to be clear about the agreement and expectations and definitely put it in writing so that you can write it off on your taxes if you don’t get paid back.
    • Potential downside: This could make a relationship awkward, and you take the risk of the borrower missing payments. But, it does protect your credit and spare you any possible legal action.
  • Take out the loan yourself: Since co-signing puts you on the hook for payments but without control, another idea would be for you to put the entire agreement in your name, then create a separate agreement with the borrower to re-pay you. That way you can ensure that payments are made, and if the borrower misses a payment, you have legal rights to the thing it paid for (like the car, apartment, etc.). This obviously doesn’t help the borrower to build their credit, but it puts the protection of yours squarely on your shoulders.
    • Potential downside: This strategy won’t work for student loans, unless you’re the parent, in which case you can take out PLUS loans, but proceed with caution.
  • Help them find a better offer: Rather than just rejecting the request outright, offer to help the borrower find a more affordable option that they can qualify for on their own. Perhaps they need to shop for a less expensive car or different loan terms. If it’s a student loan, you might suggest they take classes at a community college until they can get their credit up – this will save them money over the long haul anyway.

Remember that saying yes to co-signing can lead to a lost relationship and definitely makes it harder to say no in the future. While it might be tough in the short run, it will probably be better in the long run for everyone if the person asking looks for other options or waits until he or she can qualify without help.

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