Do you listen to the call-in segment on public radio’s Marketplace Money? I’m addicted. Every week, host Tess Vigeland and a guest expert take questions from the public, and their advice is so solid and consistent that you could make a drinking game out of it.
For example, whenever a caller says, “I cosigned a lease/loan…” you’ll hear three people sigh “oh, no”: the two hosts, and me.
The call always ends up the same way: “Now it’s on my credit report and I’m getting calls from a collection agency.” All because someone thought they were doing a small favor for a friend or relative.
When you take the oath of the personal finance writer (which I’m making up), you promise to take a hard line on a few items, such as:
- -Always take your 401(k) match, and never raid your 401(k) (this comes up on Marketplace Money a lot, too)
- -Don’t go without health insurance
- -Never cosign a lease
Here are the questions you should consider when someone asks you to cosign a lease or loan:
1. Would I be able to withstand the financial impact of paying this bill myself if necessary? If not, you can’t afford to sign.
2. What would it do to my relationship with this person if they stuck me with the bill? The answer—be honest—is usually “it would ruin it.” No matter how much you love someone, it’s hard to forget that time they ruined your credit or cost you thousands of dollars.
Easy for me to say. But when I actually got such a request recently, saying no wasn’t as simple or obvious as I’d anticipated.
A tough call
One of my favorite and most trusted relatives, whom I will call Heidi, is moving to Seattle to take a job. Because she is coming from out of state, she asked my wife and me to find her an apartment.
We were more than happy to do this. The problem: what do to when we found one? Heidi isn’t reliably within fax or email range. If we signed the lease on her behalf, I would be violating the oath. I explained to my wife, who was surprised at my vehemence on this point, that I trusted Heidi completely, but it still wasn’t a smart idea to put our credit and our family relationship on the line.
“Oh yeah?” said my wife. “When you tell her we don’t trust her enough to sign the lease, what’s that going to do for your relationship?”
Good point. I consulted an expert, Sarah Bunting, advice columnist for TomatoNation.com’s The Vine.
“Business transactions with friends and family can get sticky,” she says, “because they become personal just by virtue of the pre-existing relationships, and ‘didn’t pay me back’ becomes ‘HE HAS NO RESPECT FOR ME.’ ”
Which is pretty much what I was trying to say. “We have to choose one or the other: view it as a family interaction—a favor, really—with no expectation of repayment,” Bunting goes on. “Or we have to view it as business, and structure it as such.”
But I don’t think I’m enough of a bighearted person to view a transaction of this magnitude as a favor, and the last thing I want to do is draw up a contract, which to me sounds like, “Here, sign this document that says WE DON’T TRUST YOU in 95-point type.”
My wife also reminded me that when we moved to Seattle, my parents signed a lease for us and never gave us a hard time about it. “That’s different,” I responded lamely. “Your kids are supposed to blow a bunch of your money and then be forgiven for it. That’s why they’re called kids.” (For the record, we paid our rent on time.)
People put themselves on the line all the time to help family members, of course, and it’s hard to figure out where cosigning falls on the spectrum between, say, buying dinner and donating a kidney. Maybe someone could ask the two key questions about cosigning (can I afford it? would the relationship survive?) and say, well, yes. As long as you honestly know what you’re getting into, I’m less convinced that cosigning is always a sin.
Oh, and if you’re the person asking, consider the seriousness of your request: in financial terms, it’s kind of kidney-like.
The couch-surfing solution
In the end, we decided to go with the solution recommended by Mint’s credit score expert, John Ulzheimer: “Why don’t you offer to let her stay with you for a weekend while she finds her own apartment?” he writes. “You can blame the idea on your friend in Atlanta.”
I’m not sure I made the right call by putting my foot down and refusing to sign. Probably nothing would have gone wrong, and probably we would have figured out a way to share the financial responsibility and save the relationship on the off chance that something did go wrong.
Now, with my principles in disarray, I need to reward myself for being bighearted enough to offer up my couch, so I think I’ll take my family out to dinner. Let me just withdraw this $100 from my 401(k).
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.