Recently, the topic of cosigning a loan came up in a conversation I was having with a friend. Someone I know of cosigned a loan for another person, and now the original borrower isn’t paying any of the monthly payments. They are doing this on purpose – to get back at the person who cosigned a loan for them because of a recent falling out.
The above may sound crazy, but I have heard many stories where a person cosigned a loan and it went badly. Being a cosigner can have many consequences.
I did some research to see if there were any others who had shared crazy cosigning stories. I came across Learnvest’s article The Mistake That Plunged My Credit Score 200 Points. If you don’t believe me after reading today’s post that cosigning a loan, in general, is a bad idea, I recommend you read that article plus all of the comments on it.
Here’s a little snippet from that article:
It wasn’t until the fall of 2009, when I was thinking about getting satellite television, that I checked my credit report and discovered $10,000 in past due payments. My friend had missed not one, not two, but three mortgage payments!
Another interesting post is one I found on Reddit titled Co-Signing on a loan mistake.
As you can see, there are many who have an unfortunate story to share.
Here’s what you need to know about cosigning a loan.
What is a cosigner?
A cosigner is someone who agrees to be on a loan with another person so that they are more likely to be approved. For example, if your friend can only get a car with a cosigner (either due to them having a low credit score, not making enough money, etc.), then they may ask you to cosign so they can get approved.
However, a cosigner is agreeing to pay off the debt if the original borrower is unable to pay it in the future. So, even if the original borrower doesn’t pay a penny, the cosigner would have to make all of the payments or risk being sued, credit report damage, and more.
Related: Paying Off Debt And Budgeting: Tricks For Staying Motivated
Cosigning a loan may prevent you from being approved for future loans.
If you are thinking about buying a house, car, or something else soon that will need to be financed, you should think long and hard before you decide to be a cosigner on someone else’s loan.
This is for multiple reasons.
One, if the person doesn’t pay the monthly bills on time then you may be rejected for a loan in the future. Missed payments can damage your credit score and your credit report.
Two, your debt-to-income ratio will increase. So, even if your friend/family member pays every single bill on time, your debt to income ratio will increase and this may prevent a lender from approving your loan because they will think you have too much debt on your plate.
Being a cosigner isn’t something you can easily get rid of.
There’s not much you can do to remove yourself from a loan that you cosigned on. If the person isn’t making payments, you are stuck with it for the most part.
The loan would have to be refinanced to get your name off of it in most cases and there are many horror stories out there where the original borrower refused to refinance because then they wouldn’t be able to force the cosigner to continue to pay the monthly bill.
Plus, there are instances in which refinancing is impossible because of values tanking, the economy changing, and so on. So, while the original borrower may want to get you off the loan and refinance, it’s entirely up to the lender.
Cosigning a loan can ruin relationships.
Many cosigning relationships go sour. I have heard of many stories where someone cosigned a loan for someone else and then didn’t talk to them for decades because of a falling out of some sort.
I have always been a firm believer that money and relationships do not mix well. If you are going to cosign or lend money to someone then you should consider it a gift because there is a chance that you will never see that money again.
Cosigning a loan is up to you.
Everyone always feels like all of the cosigning horror stories out there would never happen to them. However, isn’t that how you think all cosigners felt at one time as well?
It’s up to each individual person to decide if they will cosign. However, I want you to remember that if you cosign then you should make sure that you can afford to make the monthly payment.
You never know – one day you may be making them. The original borrower may be a great person, but they may lose their job, have an unexpected expense come up, or something else that prevents them from paying their bills.
Cosigning a loan may not always be bad. However, I believe it’s better to realize what the consequences may be. It’s always better to be prepared!
Would you ever try cosigning a loan and being a cosigner? Why or why not?
Is love enough for a healthy and happy relationship, especially when it comes to financial troubles? What if your partner was hiding a secret account or was lying about their spending? Are those issues you could work past?
Unfortunately, negative issues with money and relationships are incredibly common. I actually receive lots and lots of emails from readers who are struggling with some of these exact issues. Hardly a day goes by when I don’t get a question or comment from a reader who has concerns about the bad spending or savings habits of their partner.
Here are a few of the situations I’ve been asked about:
My partner earns $50,000 a year and wants to buy a $900,000 house, and we have NO savings. How do I explain why this won’t work?
My partner has the mistaken idea that if he has a coupon for Best Buy, Bed Bath and Beyond, etc. that he must absolutely buy something because he’s “losing money if I don’t use the coupon.” He is a hoarder and spends all of his money on stuff that he will never use. How do I help him work past his issues before it’s too late for us?
My partner spends over $1,000 a month on entertainment but we have a lot of debt. How should I approach them about it?
My partner is hiding her spending from me and I know it’s happening. How do we work through this?
My partner isn’t trying to find a job but we desperately need the money. What should we do?
If these situations sound familiar, you’re not alone. In fact, 35% of Americans named money as the number one thing causing friction in their marriage. CNBC reported on a money and relationships study done by SunTrust Bank, and here are a few more findings:
In 2 out of every 5 couples, someone lies about money.
31% said that they have a secret credit card or bank account.
75% said that financial deception has hurt their marriage.
It’s no surprise that money issues are one of the leading causes of divorce.
And, according to a recent story on NPR, even couples who managed their money well together in the beginning can still struggle with financial infidelity. This is especially true if one partner earns significantly more than the other, if one spouse is laid off, etc.
Related content to money and relationships:
Now, if you’re in a relationship with someone whose financial beliefs and practices oppose your own, does that mean you’re doomed and should end it all?
There are ways you can work towards resolving your financial differences and improving the behaviors that affect your money and relationships. Before calling it quits due to financial stress, you should:
Be honest and stop keeping money secrets from your partner.
Stop ignoring the problem.
Make a budget and start following it.
Make money conversations a priority, even if they have been difficult in the past.
Me and my husband have been together for over 12 years, and we are always trying to work at our financial situation as a team. We’ve had a lot of major changes in the past few years, like selling our house and moving onto an RV and now sailboat, and because each of these changes had a lot to do with money, we’ve had to share a lot of our feelings with one another.
And, every couple is going to handle money and relationships a little differently. We all have different spending habits, and in a marriage it’s important to come together to see how your behaviors affect your shared life.
Working together is key for a happy relationship, especially when you want to meet your financial goals.
If your relationship is struggling because of financial differences, here are some steps that you may want to take.
Here is my advice for handling money and relationships
Have regular money check ins.
A relationship that has regular money talks and budget meetings is more likely to be financially successful and happier than a relationship that doesn’t. That’s because regularly communicating about money is an important step for healthy relationships.
Being open about your money situation can help prevent any surprises, it will ensure that both people in the relationship are aware of what’s going on, and so on.
Here are some of the ways for these check ins to help you with your marriage and finances:
You can work together and succeed.If you are both putting effort towards your financial goals, you can tackle them as a team and are much more likely to have a positive outcome. You can motivate one another, troubleshoot together, and brainstorm for ways to work towards your goals.
Knowing your financial situation will help you keep a budget. Understanding your financial situation means you can create and keep a budget that works for the both of you. You will know more about the amount of money you are spending, whether you are living paycheck to paycheck, and more.
Being aware may prevent everything from falling on one person. Both you and your partner should be aware of your financial situation. It’s not fair for one person to manage it all, and you would be in for a rude awakening if something were to happen to that person. You both should know how much money you make, how much debt you have, when bills need to be paid, etc.
Being involved can help you with your family’s goals.It would be quite difficult for a person to work towards their family’s financial goals if they weren’t aware of their financial situation. Being involved will keep everyone motivated and working in the same direction.
Regular money talks can lead to less fighting. When you are open about money in your relationship, you are less likely to have financial surprises and money fights. This is because conducting regular money talks and budget meetings means you will both be aware of what’s going on.
Recommended reading: Family Budget Meetings – Yes, You Need To Have Them
Be open about money.
Talking about money is seen as taboo, even among married couples. But, according to money and relationship studies reported by Policy Genius, nearly 30% of couples don’t know each other’s salaries.
I have personally met spouses who had no idea what their monthly mortgage payment was, how much student loan debt they had, and so on and so on. For some reason, it is the “norm” for one spouse to be completely clueless about their financial situation, while the other spouse handles the finances. However, this is definitely something that should change.
To become better with this money and relationships issues, you and your partner should sit down on a regular basis, like once and week or once a month, and be honest about where you are currently at. You could even use this time to pay your bills together, discuss future purchases, and more.
But, to make the most out of these money meetings you will have to go in with an open mind and be willing to share where you are at. You money meetings should include:
Your financial goals, money values, and more.
How the two of you are doing financially.
What changes may need to be made.
Any financial problems, and so on.
The key here is that both of you are up-to-date on what is going on with your marriage and finances so that everyone can work together on your family’s financial goals.
Always be honest about money in relationships.
In a money and relationships article on CNBC, it was reported that only 52% of people in relationships believe their partner is being completely honest about money. And, only 61% of people say that they are totally honest with their partner about money.
What I see there is that in many, many relationships, there are some serious trust issues when it comes to talking about money.
The problem with financial infidelity is that it can lead to even bigger financial problems (like debt piling up beyond what’s imaginable), stress, unhappiness, it may start impacting other areas of a your life (such as work), and it may even lead to divorce.
Unfortunately, it’s possible that you may already be a victim of financial infidelity without even knowing it. Here’s how to recognize the signs of financial infidelity:
You haven’t noticed any bills in the mail. This could be a sign that someone is hiding the bills.
You are getting calls from debt collectors. These may actually be legitimate calls!
Your credit cards are being declined. This could be a sign that someone is overspending without your knowledge.
Your partner no longer wants to talk about money. This could be a sign that your partner is too afraid to talk about money with you because they fear that you will uncover the truth.
Lying about money and relationships is very serious, but it’s important to realize that it’s an issue that both partners should work towards improving. While being honest with your partner is important, you should also make sure that your partner feels comfortable telling you when they are struggling.
Set spending limits for each other.
Spending limits shouldn’t be looked as limitations or rules – think about them as guidelines that help you work towards larger goals. That’s because spending limits are really just there to help you stay on track with your budget.
You can set limits however you would like, and some couples tell each other about every single purchase they make, whether they buy something for $1 or if they buy something for $1,000.
Others only tell their spouse if they reach a certain amount, such as $100.
Whatever you decide, it’s a good idea to sit down with your spouse and determine what kind of limits you should set for your specific situation.
Doing this can help keep the communication lines open with your marriage and finances so there are fewer arguments about money.
Learn how to improve your financial situation.
For anyone needing help with money and relationships, one of the best things you can do is learn how to improve your financial situation. It can be an empowering thing for you to work towards with your partner and it can bring you both closer together.
If you want to improve your financial situation, here are some of the things you may want to do:
Read financial blogs. Reading financial blogs can help you see what other people like yourself may be doing to improve their financial habits. While it may not always be perfect and/or applicable, it can be helpful to see real life examples.
Listen to financial podcasts. You can learn a lot about money and relationships by listening to others talk about their own situations and topics relevant to your life. And, there are so many amazing financial podcasts out there ‒ take your pick!
Read financial books. 17 Personal Finance Books That Will Change Your Life is a great read if you are looking for financial books to help you with money and relationships. That list shows books that will help you to pay off debt, find side hustles, manage your money better, figure out retirement, and more.
Attend money workshops. There are in-person workshops on the topic of personal finance, huge conferences, money meet-ups, and more.
Join money-related Facebook groups. I have a free Facebook community that you can find here, and another favorite of mine is ChooseFI.
The key here with this and any other money and relationships advice is to do it together. I think learning more about money can usually help get a person more motivated about improving their financial situation, so if your spouse is having a hard time managing money, this can be a good way to get them more involved.
Reevaluate your situation.
Should money break a relationship?
Some will say no, and others will say yes.
For me, I do believe that money can break a relationship. However, that doesn’t mean that divorce or separation should be the first place you go when you are struggling with financial infidelity or other issues affecting money and relationships. You will need to work on your issues together before deciding that it’s time to call it quits.
Being on the same page is so very important, and if your partner is the complete opposite of you, you may be fighting constantly, you may both be unhappy, and more. If that’s where you are at, then reevaluating your relationship may be an important next step.
Only you can determine what goes on in this step, as it’s a very personal decision and no one knows the exact issues you’ve been through and how they’ve affected your relationship.
What money and relationships advice do you have to share? What would you do with a partner who was bad with money?
Save more, spend smarter, and make your money go further
Over the past five months, I’ve had the unexpected pleasure of traveling the country with Mint to talk in 11 different cities about money in celebration of the book my company recently released, The Financial Diet. My partner Lauren and I, along with our spouses or other members of the TFD team, joined Mint up and down both coasts and in the middle of the country to speak honestly with our audience about what money means to them, and the unique challenges that their city brings, financially. (Oh, and we also drank awesome wine and had tons of great finger food — but that joy was somehow secondary to the genuine love we felt being with the community we have grown over the past few years.)
And talking about money, for us, isn’t just a hashtag, or a way to promote our book. It is the very reason we have done what we do these past few years, the thing that motivates us when we get up each day for work. Because if I hadn’t been lightly pushed by my exasperated then-boyfriend to download Mint four years ago, and forced myself into a conversation about my finances that has grown past anything I could have ever conceived, I would still almost certainly be in a position where money alternately terrified and bored me. I was terrible with money because I refused to talk or even think about it, and everything from ruining my credit score to going into credit card debt felt completely irreversible because of that fundamental fear. But I know now that in talking about money, in confronting it head-on and making it a value-neutral, ongoing conversation in your life, you can overcome any obstacle or fix any mistake, financially. Life is long, and today is always the best day to get started living it well.
It was interesting, though, seeing that even amongst the groups of women who came to our events, who came from incredibly diverse backgrounds and approached their individual finances in entirely different ways, that there were themes which kept reappearing over and over. Yes, there were unique challenges to each city (Austin is growing much too quickly for its residents to keep up, Atlanta is in desperate need of improved public transportation), but there were also common threads that we heard almost without exception at each stop. Here, the four things we heard most frequently while talking about money on the road.
“My partner and I don’t agree about how to deal with money. How do we overcome that?”
One of the biggest recurring themes at our tour events was the idea that couples fundamentally disagreed on how to handle, or even talk about, money. And that’s not surprising — everyone comes to a relationship with money baggage, whether it comes from being raised with a lot of it, very little of it, or something in-between. Some people were raised to avoid the topic entirely, others were taught to micromanage every detail. And as our money and relationships expert Olivia Mellan explains in our book, the most common dynamic in relationships is a spender who is married to a saver, in whatever form they may take. One person simply plays closer and more conservatively with money than the other, and from that fundamental disagreement can stem near-endless problems.
But two fundamental components of any healthy, long-term relationship from a financial view are 1) speaking openly and frequently about money, so that secrets cannot accrue or small cracks cannot expand, and 2) having a separate, independent bank account for each member of the couple which is totally their own. Even if it’s just a very small amount, a tiny discretionary fund, it is so important for each person to feel empowered and fulfilled by what they want to spend (or save) on without having to ask the other person for permission.
In your “fun fund,” you might want to devote half to saving for a girl’s trip and half to spending on skincare products. Or you might want to use it to take yourself to movies and dinner sometimes, or just save for something big you can’t even imagine yet. But having money that is entirely individual provides a release valve for all of the other compromises that will be made on the money you share.
Two people never have to fully agree on money, but they do have to learn to live with one another’s money baggage and differing approaches. Having the topic be an open, value-neutral one, and having that separate money for individual spending, allow that to happen.
“What do you do when you earn much more than your friends, or much less?”
One story I found myself telling over and over on the tour was the experience I had through high school and college, when I was a decidedly middle-class person in an undeniably rich-kid town. I socialized with many, many people whose parents earned (literally) ten times what mine did, and whose lives and access looked wildly different as a result. And aside from profoundly skewing my idea of what “normal” was — I didn’t know then that it wasn’t normal to have many friends who went to a $30,000-per-year high school — it also led me to spend money I didn’t have in an effort to keep up appearances.
I went into credit card debt, tanked my credit score, and drained eight years’ worth of summer job savings all in the span of about a year, wasting that money on a lifestyle that never belonged to me. And from that experience, I learned that the most important thing anyone can do for their mental health when it comes to the finances of your social life is to make sure that you have at least some friends who are close to your level, financially, because being the only one on one side or another of the spectrum will only lead to a distortion of perspective and deep self-consciousness.
Beyond that, it is up to the person who is more comfortable financially to lead the conversation, offer options, be candid with costs, and not expect the other person to follow suit. Having more money in a friendship is a great place of privilege, and one that requires both sensitivity and understanding that the conversation might not come easily to the person with less. But above all, no matter how much you earn, the phrase “it’s not in my budget” needs to be in everyone’s vocabulary. There is nothing chic about going into credit card debt to pay for someone else’s idea of a social life.
“Do I really have to have a retirement account?”
At the risk of sounding like your parents, yes. Absolutely yes.
And although the women at our events were almost universally savvy, motivated women, this question came up again and again. Having a retirement account can feel like that sort of vague, important-in-theory thing you can easily put off, but every day you are not putting that pre-tax money away (and particularly if you are missing out on an employer match) is a day you will be kicking yourself for later.
Although it may not feel that way, we will all want to retire one day, and not having the option to leave our jobs is something that no one should have to face. The younger you start saving, the more time you have to let that money grow and work for you, and although it may not be as immediately-satisfying as spending that money on something you want in the short term, once you start your retirement saving, there is a profound comfort to be found in watching it grow over time and knowing that that money is the nest you are building for yourself, because you care about yourself enough to take care of Future You.
“How do I balance paying off my loans with living life?”
Ultimately, the biggest question that most people face when it comes down to the day-to-day of personal finance is how to live the life you want while doing what is right for you. And for many people, that means balancing their loan payments (which for many people can feel overwhelming) with the other things you’d frankly much rather be doing with your money. But something we have learned over the years at TFD is that, first of all, you probably need much less than you imagine you do to be happy.
When we were first starting the company and could not take a salary for over a year, Lauren and I suddenly saw our household incomes drop by nearly half, and had to severely reduce our lifestyles as a result. And though it was self-imposed in starting a business, it taught us that so much of what we were spending on, so much of what we felt was necessary to our happiness or fulfillment, was really just mindless buying.
Lauren as an example lived at home until she was 25 in order to help pay down her loans, and though she certainly longed to live on her own earlier, she was able to find a readjusted idea of happiness while living with her parents. When I went to community college instead of the four-year schools I dreamed of to save money, I wished I could sign on the dotted line to go to those dream schools, but I learned to be happy in the life I was living.
The greater the gap you can create between “what you could technically afford to spend” and “what you need to spend in order to live well,” the wealthier you will feel, regardless of what you earn. And if repaying loans is part of your day-to-day money life, you must learn to treat that money as never yours in the first place — you can’t count what your life would be like with that loan money and then watch it go out the door, or you will be full of resentment and envy each month.
You have what you have, you owe what you owe, you are who you are.
Now with all that information, take stock of your life. Go through every purchase last month and highlight every one you don’t remember making. Realize how much of your spending is done without even thinking, and how many purchases really don’t bring you much happiness in the long run. And if you can start thinking about your money like that — reduced down to the essence of what matters, and what has real value — suddenly the balancing act won’t seem nearly as hard as you thought.
Wondering how to deal with money issues in a relationship? Recently, I received an email from a reader who said to me, “Financial stress is killing my marriage. What can I do?” Sadly, this isn’t the first time I’ve received an email like this. Over the years, I’ve had many people email me questions about […]
The post Money Issues In A Relationship – Donât Let Money Break Up Your Marriage appeared first on Making Sense Of Cents.
One of the worst financial mistakes a person can make is cosigning for another person. Okay, before you think I’m a heartless person, just hear me out. No matter how well you think you know someone, mixing money and relationships can completely change things. What you may have thought was a wonderful friendship or family […]
The post Would you risk your relationship and finances to cosign for a friend? appeared first on Making Sense Of Cents.
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