One pitfall a lot of people fall into is co-signing on a loan. This is not something that just young adults who are lacking in financial experience do. A lot of people seem to think that co-signing on a loan is like giving a reference. That it’s like saying, sure you can trust John. He’s a good guy. It’s not. When you co-sign on a loan you are saying that you will make the payments if the person who got the loan stops paying.
This can be devastating to your personal finances. If someone buys a car that requires payments of $560 a month and that person stops paying the bank is going to expect you, the co-signer, to make those payments. How easily can you absorb a $560 payment that you weren’t planning for? And worse than that, for something you don’t even have.
You’re probably thinking the heck with that. I won’t pay it. I’ll let them repossess the car. You can do that. But since you are a co-signer and are refusing to honor the contract in which you agreed to pay if the person who took out the loan didn’t then your credit will be affected. A repossession for failure to pay is a big negative on your credit history and it stays there for a long time.
Do yourself a favor and avoid co-signing for anyone. It will be hard if a good friend comes to you asking you to do it. It’s hard to turn our friends down when they are asking for help and they may get offended and feel that you don’t trust them. Whether you do or don’t doesn’t matter. Co-signing is a long-term commitment, almost a mini-marriage to your friend. You don’t know what will happen in their life that could affect their ability to pay.
You have to look out for your finances and your future. And maybe it’s best for your friend too. If he can’t get something on his own good credit then maybe he’s not in the financial position to get it yet and needs to wait until his finances are more stable.