When it comes to questions of lending money or cosigning loans for others, financial expert Andrés Gutiérrez has only one answer: Don't do it.
Lending money to familyCosigning is normally defined as signing and taking financial responsibility for someone else's loan. However, when financial expert Andrés Gutiérrez gets asked to describe it, he defines it as "putting yourself in the way of a firing squad to save someone else."
"What people don't seem to understand is that the cosigner becomes the legal owner of the property, and when the borrower falls into default, the lender goes after cosigner," says Gutiérrez. "The person who's asking for a cosigner has already been deemed unworthy of credit by a lending institution," continues the financial expert, implying the individual asking you to front the loan probably isn't in a good position to ever repay you considering the banks have already denied him/her.
In many instances, the decision is made because the cosigner knows the borrower personally and wants to help. In the Latino community the pressure to cosign or lend is intensified given the high expectations placed on helping a family member or a friend in need, whether it be helping a newly immigrated cousin get a car or sending money to family back in another country. Denying financial help is met at best with the silent treatment and at worst with hostility. Giving in to cosigning, then, becomes the easy way out.
Just say "no"
When it comes to declining a request for cosigning, Gutiérrez suggests just saying "no." "I know people have a hard time saying no; they don't want to hurt other people's feelings." He suggests following that decline with a brief response like, "I can't sign for you. You need to build your own credit history, and show you can be responsible for your own finances," standing by your decision.
What about lending money?
When an amigo or someone in the family comes looking to borrow money, Gutiérrez also gives an unequivocal "no."
"Lending money to someone you care for changes the relationship completely…it turns into what an old Biblical proverb says 'the borrower is servant to the lender'," says Gutiérrez, who suggests you offer to help the person establish a budget and build an emergency fund to get them back on their financial feet.
If there's a real and immediate need, Gutiérrez advises to forgo lending the money and give it instead. Being able to give, however, requires plan and preparation. He recommends adding an "extra giving" section to your budget, and put money towards it. "One of the joys of being a good money manager is the ability to give when there's a need," says the expert.
At the end, a no can help more than it can hurt, especially if you help the borrower understand how to manage his or her money. More than anything, plan on giving, instead of lending or cosigning, to keep stability in your relationships.
Financial expert Andrés Gutiérrez is the host of "The Andrés Gutiérrez Show" and creator of Paz Financiera. A successful entrepreneur and small-business owner, Andrés Gutiérrez knows what it's like to start with nothing and build lasting wealth. After hosting a San Antonio financial radio program and appearing frequently as a financial expert on the Telemundo television network, Andres joined Dave Ramsey's team in 2009 to bring the message of Financial Peace to the Spanish-speaking community.