What Does the Bible Say About Co-Signing A Loan?
The Bible is chock-full of amazing financial advice, and while it doesn’t address every problem we’ll possibly run into in our lives, the things it does discuss should warrant special attention from us.
Sometimes we can make the mistake of thinking the Bible doesn’t talk about financial concepts like interest, diversification, loans, or making a budget, but the reality is that it not only talks about them in a descriptive sense; it also lets us know how we as Christians should relate with them. The Bible even talks about the concept of co-signing a loan.
If you’re familiar with what cosigning a loan means, it usually is done in the context of a parent cosigning a car loan, mortgage, or Parent PLUS Student Loan to help their kid finance what they need as they move forward in adulthood. Though, what many parents may not know is that if their child doesn’t make their payments, parents are ultimately held responsible for the debt. That’s the purpose of cosigning a loan. The bank or lender doesn’t trust the child on their own, but if attached to someone with a more established credit and financial history, they feel better about lending the money knowing there is a higher chance of the debt being paid back.
When it comes to cosigning a loan, we often might think it’s admirable because we are usually helping someone in the process. However, the risk far outweighs the benefit that you would be providing somebody as you can find yourself in a tough financial predicament if not careful.
This isn’t meant to dog on people who have cosigned a loan because their hearts are usually in right place and it is beautiful that they are willing to do so much for someone they love. But the reality is that when you put yourself in a cosigning relationship on any loan, you are putting your financial future at risk ultimately to temporarily help the person you’re cosigning the loan for.
In fact, the Bible specifically talks about this very subject on multiple occasions in the book of Proverbs. Let’s look at a few passages that speak to this idea:
· “One who has no sense shakes hands in pledge and puts up security for a neighbor.” – Proverbs 17:18
· “Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you.” – Proverbs 22:26-27
· “Whoever puts up security for a stranger will surely suffer, but whoever refuses to shake hands in pledge is safe.” – Proverbs 11:15
· “My son, if you have put up security for your neighbor, if you have shaken hands in pledge for a stranger, you have been trapped by what you said, ensnared by the words of your mouth.” – Proverbs 6:1-2
As you can see, there is a key theme that makes an appearance in each one of these passages: co-signing a loan on behalf of someone else is dangerous. Yes, it is sweet that you want to help a friend in need or a child who is trying to get established in adulthood, but Scripture time after time refers to this type of decision as foolish and unwise.
Not to mention, if you know the person you are cosigning the loan for, it can have detrimental effects on the relationship if that friend or child decides to default on the loan and leave you with the bill.
What if I have already Cosigned a Loan?
If you are already in this position, the best way to handle it moving forward is to do your absolute best to remove yourself from the loan. Of course, there is no guarantee this will work as it will depend on what the other person is willing to do in this scenario. Here are a few ideas to consider:
· The borrower can choose to refinance the loan and request that your name be removed from responsibility.
· You can try to convince the other borrower to sell the item which the loan is financing and if that were the case, the sale would pay off the balance. Of course, with depreciating assets, this can be tricky since you may not be able to sell the financed property for the amount you still owe on it, so you might have a leftover balance to cover.
· You could decide to pay the balance off yourself and never decide to cosign again. While this is the least ideal, this option is by far the scenario where you will have the most control on the outcome.
At the end of the day, while the idea of cosigning a loan sounds loving to those we are doing it for, God’s Word reminds us time and time again in the book of Proverbs that this is an unwise way to manage our finances. If we really want to help those we love financially, we can decide to help them with a financial gift out of our pocket. That way there are no strings attached and both parties can equally enjoy the gift of generosity.