Why We Say “No” to Co-signing and Making Loans

by Joe Plemon on August 13, 2010

I recently shared a real life story of how creating a “no” policy before you need it can not only give you clarity and grace in saying no, but can help avoid awkwardness when trying to find the right words for your no. In this case, we enacted our “no” policy to co-signing, but we also have a similar policy for lending money.

Read on for the rationale behind our policies.

No to Co-signing

  • The bible warns against it.

Proverbs 17:18 tells us “It’s poor judgment to guarantee another person’s debt or put up security for a friend.”  In today’s language, it could read, “Don’t cosign a loan“.   Proverbs 22:26 and Proverbs 11:15 give similarly stern warnings against the wisdom of co-signing. Because the bible is written to give us wisdom, ignoring these warnings is unwise.

  • Doesn’t really help.

The reason the person needs a co-signer is because the lender doesn’t have confidence he/she can pay. The core issues of poor credit or money mismanagement are pushed beneath the surface when I or anyone else co-signs. Therefore, co-signing simply perpetuates these issues instead of dealing with them.

  • We are against debt.

We personally don’t have any debt, so co-signing to enable someone else’s debt is hypocritical to our value system. We realize that not everyone shares our values. That is fine…we are not preachy about them. But when someone asks us to do something which contradicts those values, we believe our answer should be consistent with our practices.

  • We could end up paying the debt.

As previously mentioned, the reason this person needs a co-signer is because the lender doesn’t think he can pay. If the lender is right, we will end up paying.

  • Our credit rating could be damaged.

My hunch is that when the borrower is going to miss a payment, he/she won’t immediately call me to tell me. I probably won’t even know about it until the lender contacts me. Therefore, the missed payment(s) will ding my credit score.

  • The relationship is jeopardized.

When we end up paying someone else’s debt, our relationship with that person will be strained or even broken. Simply being in the same room would be awkward. I would prefer to say ‘no” in the first place, even if my no is not well received, than take the risk of having the relationship eventually destroyed.

No to Loans

  • We are against debt.

Same thoughts as above, except now we are not only enabling debt, but fully participating in it.

  • The relationship is changed.

Again, very similar to my thoughts on co-signing, except now the relationship is immediately changed, even if the loan is being paid. What do I mean? Proverbs 22:7 reads “Just as the rich rule the poor, so the borrower is servant to the lender.” By virtue of making a loan, we have placed the borrower in the position of slave in our relationship. We don’t want anyone to feel like a slave, but debt does that.

  • The relationship could be destroyed.

If for any reason the loan cannot be repaid, the relationship could be destroyed. “Helping” someone with a loan is not worth the risk of jeopardizing our relationship.

  • If we can afford to loan the money, we can afford to give it.

We are not tightfisted skinflints; we may not loan money, but if we see a real need and we believe the person is doing his best (working, cutting back on spending, having yard sales, etc), we will give the money – no strings attached. Like I said,  if we could afford to lend it, we could afford to give it.

We feel that giving is the best way to honor God. After all, he is the best giver ever.

Two very helpful posts on why not to co-sign are:

2 Reasons Co-signing is a Bad Idea at Christian Common Sense

Should I Cosign For a Loan? at Faithful With a Few

How about you? When have you co-signed for a friend? When have you loaned money to (or borrowed money from) a friend? How did it turn out?

Creative Commons License photo credit: polkadotted1

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{ 11 comments… read them below or add one }

Khaleef @ KNS Financial August 13, 2010 at 7:43 am

Hey Joe, I have really enjoyed your “No” series! I think you made an excellent point in regards to not contradicting your values. I never thought of it that way. This series will definitely help my wife and I ensure we have our various policies in place.

And thanks for linking to my article!

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joeplemon August 13, 2010 at 9:14 am

Khaleef,
Thanks for the encouraging words. I never really intended to start a “no” series, but one post led to another. I am glad that the series is challenging you and your wife to get your various policies in place. Let me know how that goes and if you come up with policy items I haven’t addressed.

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Invest It Wisely August 13, 2010 at 10:09 am

Another great post in the series, Joe.
“By virtue of making a loan, we have placed the borrower in the position of slave in our relationship. We don’t want anyone to feel like a slave, but debt does that.”

That is why it is better to make loans to people with whom you do not have a personal relationship, and perhaps even better to do it indirectly by using investments (i.e. buying bonds, etc….)

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joeplemon August 13, 2010 at 10:24 am

Kevin,
Thanks for the good word. And yes, making loans in the form of purchasing bonds is vastly different than making personal loans.
Great point!

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Craig/FFB August 13, 2010 at 10:53 pm

There really is too much to lose in co-signing and in giving loans. Though I’d probably give a personal loan under certain circumstances like maybe if it was a low amount I knew would be paid back.

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Roshawn @ Watson Inc August 13, 2010 at 11:18 pm

Lending money through bonds is truly being the lender and not the borrower, and yet you don’t have the same relationship headaches. When I first thought of it that way, I knew this was an exception to my no lending policy.

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joeplemon August 14, 2010 at 8:58 am

@Craig,
For the sake of consistency, we try not to make even small loans when we know we will be paid back…but (true confessions) we still do occasionally.

@Roshawn,
I agree. Our rationale against making loans is primarily to prevent relationship problems. Purchasing bonds is impersonal and therefore eliminates those concerns.

What do you think about “Lending Club” types of loans? They are normally impersonal, but sometimes the lender earmarks the loan for a specific borrower.

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Roshawn @ Watson Inc August 16, 2010 at 1:31 pm

I avoid lending club and other similar types of businesses. I am not big on lending outside of typical investment vehicles (with proven track records). I would rather give it and and be free than worry about whether I get my money back. If I don’t have it to give or don’t want to give, I don’t.

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joeplemon August 16, 2010 at 2:25 pm

Roshawn,
You think like I do! Isn’t giving a freeing act?

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Church Mortgage August 23, 2010 at 3:18 pm

Joe,

As one Christian to another I appreciate your reference to Biblical advice on borrowing.

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joeplemon August 23, 2010 at 4:46 pm

Church Mortgage,
Thanks, but if I ever take biblical passages out of context, I want you to call me out on it. Fair enough?

Reply

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