Family Finance Expert
Shannon King Nash, Esq., CPA

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This Month's Topic: Co-signing Loans

My friend wants me to co-sign a loan for her. Her credit is bad; mine is good. We have been friends for years and I want to help her out. However, I do not want to ruin my credit in case she does not pay on time. How do I protect myself if I decide to go ahead and help her get the loan?


Don’t do it!!!!!! Your credit is key and like a prized possession that should be protected at all costs. It’s one of the oldest stories in the book—friend borrows from friend, borrowing friend doesn’t pay on loan, lending friend’s credit gets ruined and the great friendship is over. It’s good that you have found a friend or “Road Dawg” who feels comfortable enough to involve you in her financial business. But really, you need to ask yourself-- is this a true friend or someone who is taking advantage of your niceness? One song come to mind for me here:

Have you ever been stabbed in the back
By someone you thought was really cool
Did they steal your heart or was it money
Or was it lies they told
Strangers just disguised as your friends
Never again ‘cause now you know
That friends will let you down
Friends won’t be around
When you need them most
Where are your friend

“Friends,” by Jody Watley featuring Erik B. & Rakin circa 1989

When your friend was busy damaging her credit, did she come to you for advice? If not, she should have or you should have shared some wisdom since you’re obviously doing something right as your credit is good.

But it’s too late for that now. I know this may be a real good “friend” of yours, but mixing finance with friendship is often a bad idea. If she doesn’t pay, the creditors will certainly come after you for payment and there’s little you can do to protect yourself from this. It is possible she could be a true friend who would never mess up your credit (although apparently she has no problem ruining her own).

If you do decide to co-sign on this loan, make sure you check your own credit report often (twice a year) to make sure that you’re friend is in fact paying on the loan. Go to http://www.myfico.com to get a copy of your credit report. If she’s not paying, you will have to make the payments yourself to protect your credit, so make sure you can afford another monthly bill.

If you follow my advice and say "no" to the co-signing, you can still help your friend by teaching her your good financial skills. Try the following:

• Help your friend clean up her credit -- review her credit report, get rid of high interest credit cards, and look at consolidating loans.

• Help her find another job or a second job. If she can show more income and a better payment history, even in a 6-month time frame this can go a long way in helping her qualify for a loan.

• If you really can’t tolerate the pressure from your friend, as a very last resort offer her a loan. But, make sure to document the loan with a legal note, or risk standing up on Judge Mathis fighting your case. In the worse case, she’ll default on the loan but at least you’re credit will be intact.

See my article this month on CelebratingChildren.com on the Top 10 Financial Tips for African Americans, under Tip 5 for more on this.

~Shannon Nash


October 6, 2004

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Reader response:

Dear Shannon,

I just finished reading your article in "Family Finance" on the "Celebrating Children" website. Topic: Co-signing loans.

I wanted to comment on your respond to the question whether it is good or bad to co-sign with a friend.

I had a really bad/scary experience with a very, very close friend of mine.

She and her husband are divorced and she needed a place to
stay. Her credit was really bad, so no landlord wanted to rent her an apartment. She asked me to co-sign with her because I have good credit. I decided to co-sign with her and almost lost a change to buy a home for my family.

I co-signed with her in January of 2004 and in October of 2004 I received a letter from a lawyer telling me that I owed $9000 in back rent. I almost went crazy, because at that time, my husband and I were shopping around for our first house. It turned out that my friend
was not paying her rent and after numerous warnings from the landlord, he decided to take her to court to get his money. Since I was the primary on the lease agreement, I was the one who had to pay. If I didn't pay, he would report it and it would end up on my credit report.

I was very angry that she never told me about her inability to pay the rent, even though I asked her every month if she was OK with the rent. To make a long story short, the landlord and his lawyer were very nice and gave my friend and I a three month period to pay of the back rent. She ended up paying half of it on her own and the other half was paid by a government program she signed up for to help low-income families.

I will NEVER co-sign anything with anyone ever again, no matter who it is. My husband was very angry with me, but everything worked out fine and we are enjoying our beautiful house that we were able to purchase. My
friend and I are still good friends but I made it abundantly clear that I will not co-sign anything or lend her any money ever
again.

I really appreciate your advice.

Take care,
M. P., Oakland, CA
December 12, 2005